One of the common comments we have heard over the years is "I found a great entry, but exited the position way too early". This is a common issue with a newer trader and it also happens with seasoned traders, as well. We also hear from folks who hold too long and give back some of their profit.
In my opinion, when to exit a position is the most difficult aspect of trading. The stop loss side of the position should be somewhat easy if the entry was on a candlestick reversal pattern, although there are many different styles and theories for using stop losses. This is one of the great advantages of using Japanese candlestick charting.
Today, I wanted to talk about the other side of the trade, when to exit a profitable trade. I just want to say one more thing about the stop loss before we go onto capturing profits. I believe there is a time on most trades to move your stop to the break-even point once gets into the green.
There is no specific level for me to move the stop to break-even; it really depends on the chart.
This is something that you will learn with experience. You don’t want to move it so tight that you get stopped out and then the market moves higher without you.
My target is usually the most recent prior high or prior low, or a Fibonacci play. Let’s say we take a long swing position at 100.00. The stop is 89.00 and the target is 127.00. The stop is based on a candlestick reversal patterns and the target is the most recent high. Our candlestick charting strategies typically use the recent highs and lows for the initial target.
We want to continue to watch the price action very closely. Let’s say price moves to 111.00 and we move our stop to the break-even point. Now it’s a no-lose trade, love those, and we want to squeeze as much profit as possible out of this and every trade that we make. This is also the point where the newer trader might be very excited and close out their position.
We have several options for taking our profit at this point. We should now take our profit if we see a candlestick turning point. We should also sell at least ½ of the position if we are seeing northern doji or spinning tops at or just below the prior high at 127.00. I will often exit the entire position if I see this condition. But, if price blows through the prior high with a long candlestick there is no need to take profit. We would then want either a hard stop under 127.00 or some type of trailing stop with the next prior high as out new target.
Hopefully, this helps if you are currently exiting positions prematurely. Where you exit these positions is a huge factor in your profit level. Candlestick charts give you a distinct advantage when trying to get the most out of each trade.
New to candlestick charts? Check out Steve’s FREE video introduction on Candlestick Charting here.