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Exiting With Money
The trade exit is the fun part; this is where your money is made. As a trader, this is your payday. When it comes to exits, all traders fit into one of two camps, runners and gunners. Runners and gunners are competing philosophies, and most traders will clearly identify with one or the other. It is important for you to decide right now before you read any further whether you identify with the runners or the gunners. The easiest way to determine which camp you fall into is to think about your answer to this question: Is it more important for you to have a high win rate or is it more important for you to have huge winning trades?
If you would rather have a high win rate, then you will probably have relatively small winners. You may have a high percentage of winners, but the average winning trade will probably be relatively small. If this is your style of trading, then you are a gunner. This is in contrast to the runner because if you are a runner, then you prefer to have huge winning trades. This means that many of your trades may end up as losing trades, or break-even trades, but the few giant winning trades will make up for these losing trades. Runner or gunner, it does not matter which is your.
Runners
The runners are those traders who are looking out for the next big thing.These traders want to capture a large chunk of profit every trade. These traders have a strong sense of confidence. This confidence is unwavering and will not diminish in themidst of a losing streak. The runners are always hopeful that the next trade will end up as a beautiful, long-lasting trade.
The long-running trades are what make profitable trading possible for the runners. Runners look at strong trending charts and think “now that is a trend that I would love to capture.” Runners understand that most of the time the market will not run in an extended trend. Runners are aware that a trading system may not have a high win rate. Runners wish to capture as much profit as possible, but they admit that it is unknown how far the market may move after entering a trade. Runners acknowledge that the market may not move very far, but once in a while the market may go very far and accelerate in a trending market.
Therefore, the win rate is not the most important statistic for runners. Runners are much more excited about the profits that come with the long-lasting trades that capture a trending market. The patience exhibited by runners is extremely difficult for the other group to understand.Gunners have an altogether different perspective on trading.
Gunners
Gunners are a different breed. Winning is everything to gunners. Perhaps many gunners have a difficult time sitting through losing streaks. Or, it may be that gunners find it difficult to watch a trade go from profit to a breakeven result. It may be that gunners are more impatient than runners, but in the end it really does not matter.Gunners may also find profit in naked trading. Gunners, like runners, may decide to trade the kangaroo tail, the big belts, or any other nakedtrading strategy. However, gunners are interested in quick satisfaction.
Patience may not be one of the defining traits for gunners. Gunners understand that under normal circumstances the market is often moving up and down, up and down. Gunners believe the chances of capturing a strong trend are often quite minimal. This is why gunners are fine with small, consistent profits that they extract from the market. After all, gunners understand that these small profits will quickly add up.
Exit Strategies
By now, you understand the respective philosophies of runners and gunners.It does not matter if you decide to adopt the gunner philosophy and find consistent quick profits in the market or if you decide to side with the runners and try to capture a trending market for huge profits. The important thing is that you understand what makes sense to you and that you adopt and maintain this exit strategy in your trading. The first two exit strategies are for the gunners: the zone exit and the split exit. The second two exit strategies are for the runners: the modified split exit and the threebar exit.
Exits for Gunners
Gunners are interested in quick profits. Gunners want to get in and out of a trade, and gunners love winning trades. The zone exit and the split exit are designed to take profits at the most important spots on the chart—the zones. Recall that the zones are those spots on the chart where the market repeatedly reverses. There is another characteristic of the zones that is important for the naked trader.
Zones are also magnets: The market tends to be attracted to these places on the chart. In other words, zones are simultaneously price barriers and price magnets.Exits based on zones take advantage of the fact that zones attract price.
Zone Exit
The zone exit is the basic exit for the naked trader. The naked trader looks to initiate trades at zones, and the naked trader looks to exit trades at these same zones. The basic philosophy of the naked trader is this: The market tends to bounce off zones repeatedly, like a pinball. Therefore, it is perfectly reasonable to look to these zones as potential profit targets.
These zones are the most important places on the naked trader’s chart.Take a look at Figure 11.1, a one-hour chart on the EUR/JPY.
FIGURE 11.1 This is a bearish big shadow on the EUR/JPY one-hour chart. Using the zone exit, this trade makes 48 pips within two candlesticks, a very quick profit.
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By now, you will recognize this as a bearish big shadow. A sell stop below the low of the bearish big shadow netted 48 pips using the simple zone exit. Notice, also, that it only took two candlesticks to achieve this profit target.Here is another example of a zone exit, this time it is the GBP/JPY fourhour chart in Figure 11.2.
FIGURE 11.2 The bullish kangaroo tail on the GBP/JPY four-hour chart makes 86 pips four candlesticks after the trade is triggered. Notice how the market immediately reversed after reaching this zone. The zone exit enables the naked trader to avoid many losing or break-even trades simply because the profit target is often close to the entry price.
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Again, you will now be familiar with the trade setup. In this case it is a bullish kangaroo tail. With a buy stop entry placed just above the high of the bullish kangaroo tail, the target is achieved within four candlesticks. This trade made 86 pips. It is important to note that the zone exit is extremely easy to implement, and it may be applied when the trade is initiated.
In other words, you will know when you place your trade order exactly where the exit will be. There is no managing the trade, there is no need to watch the trade, and,therefore, this is a nice trade exit for you if you do not sit and watch the charts.
Sometimes the market will get very near a zone, and then trade away from the zone. For this reason it is important that you place the profit target near the zone, with sufficient cushion. For sell trades, the profit target should be several pips above the nearest zone, and for buy trades the profit target should be several pips below the nearest zone.
FIGURE 11.3 The AUD/USD four-hour chart shows a nice bullish kangaroo tail.This trade made 69 pips because the profit target was a few pips below where this zone was drawn on the chart. Placing a profit target precisely on the zone would have meant missing out on a profit and watching the market fall down and go against the trade.
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In Figure 11.3 you can see where this rule enabled the naked trader to exit this trade with a profit. The zone exit is a powerful exit, and many gunners find it easy to apply this exit. The split exit will often enable a quick profit, so it is ideal for traders who do not have the patience to wait through a long trade.
Split Exit The problem with the zone exit is that often the market will go much further than the first zone, and this may lead to frustration. Even gunners like to have trades that extend for a long time. The split exit is, therefore, a compromise that gunners may use to allow for the market to go a bit further than the first zone. Like the zone exit, the split exit may be used by those naked traders who are interested in hands-free trading.
To use the split exit, the naked trader must divide the trading position into separate positions. One simple way to do this is to divide the trade in half. So, for instance, if a trade has six lots, a split exit would mean using one target for three lots and a different target for the other three lots.
This is how a split exit is executed: The first zone, the nearest zone to the entry price, is used as a profit target for half the position, and the next closest zone is used as a profit target for the remaining position. Once the market achieves the first profit target, at the nearest zone, the stop loss is moved to break even for the remaining position. This obviously reduces the risk for the remaining position. The position will either hit the second profit target or it will be stopped at breakeven.An example will illustrate how the split exit should be used.
FIGURE 11.4 The AUD/JPY one-hour chart prints a bearish kangaroo tail on an important zone. Using the split exit, the naked trader is able to find 33 pips of profit on the first zone, and an additional 65 pips of profit at the second zone below the entry price.
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In Figure 11.4 there is a bearish kangaroo tail on the AUD/JPY one-hour chart.The market quickly falls to the first zone, 30 pips away, and so half the position bags 30 pips. The remaining half of the position becomes risk-free because the stop loss is now moved to the entry price. The market does retrace, but it does not make it back to the entry price. The market instead falls further, all the way down to the second zone, where the remaining position exited for a profit of 65 pips.
The split exit will not always make additional profit. Some of these trades will end up with a nsmaller win simply because the market will come back and close out the remaining position at breakeven.
FIGURE 11.5 The AUD/NZD daily chart prints a bearish kangaroo tail on an important zone. The split exit enables the naked trader to make 73 pips at the first zone, but the market retraces beyond the entry point for a break-even result on the remaining trade.
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In Figure 11.5, the AUD/NZD daily chart offers a bearish kangaroo tail on a zone. Using a split exit with this trade, the naked trader finds a profit of 73 pips at the nearest zone, but afterwards the market moves higher and hits the breakeven stop loss.The split exit will require more patience than the zone exit. The fact remains that some trades will be stopped at breakeven when following the rules of the split exit.
However, obviously, some trades will also make it to the second zone, and, therefore, the average size of the winning trades will increase. The split exit is, in essence, a compromise, a compromise for the gunners. Most gunners will be unable to apply the exit strategies that are appropriate for the more patient runners.
If you are a gunner but would like to increase the size of your average winning trade, the split exit may be the exit for you. If you are thinking that both the zone exit and the split exit do not take advantage of the strong trending moves that you observe in the markets, you are probably thinking like a runner. Read the next section to see how runners approach their trading exits.
Exits for Runners
Runners see things a bit differently. Runners love bagging the big trade.Runners have incredible confidence in their trading systems. Runners are in it for the long haul. Runners use exit strategies to take advantage of trending markets.The first exit for runners is similar to some of the gunner exits. This exit is called the ladder exit. The second exit for runners is a little bit different because it is not based on the zones. Both of these exits are classified as trailing exits, which simply means that they take advantage of trending markets.
All trailing exits are a compromise. There are two parts to the trailing exit. The trailing exit must allow a cushion so the market may move against the position, and the trailing exit must have a line in the sand to capture the profit once the market moves too far against a position.
Both the ladder exit and the three bar exit do best during trending markets.The ladder exit uses zones to identify profit targets, whereas the threebar exit uses an entirely different approach.Ladder Exit The ladder exit is similar to the previous exits in that zones are used to identify profit targets.
The difference, however, is that each zone is a potential profit target. When using the ladder exit, the naked trader never knows where the final exit price will be; this is because the ladder exit allows the market some breathing room. This is how the ladder exit works: Once a trade is initiated, the stop loss is moved in accordance with how far the market has moved. So, for example, if the market moves from the entry price to the closest zone, then the stop loss is moved to breakeven.
Once the market moves further to the second closest zone to the entry price the stop loss is moved from breakeven to the first zone, and so forth. The easiest way to see how the ladder exit is executed is to look at an example.
FIGURE 11.6 This is a bearish big belt on the GBP/USD four-hour chart. 1. The stop loss is above the high of the bearish big belt. 2. The stop loss moves to breakeven once the market reaches the first zone. 3. The stop loss moves to the first zone once the market reaches the second zone, this is where the trade is exited for 128 pips.
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Figure 11.6 is the GBP/USD four-hour chart. A bearish big belt prints on the 1.6460 zone.The market trades down to the 1.6270 zone, so the stop loss is moved from the high of the big belt candlestick to breakeven.
Then the market hits the next zone at 1.6135, so the stop loss is moved to the 1.6270 zone. The market turns around and trades back up to the 1.6270 zone, where the trade is exited for a gain of 128 pips.Patience is needed to employ the ladder exit. Take a look at
FIGURE 11.7 The ladder exit on a weekly EUR/USD bullish kangaroo tail. 1. The stop loss is first placed below the low of the kangaroo tail. 2. The stop loss is moved to breakeven once the market reaches the 0.87500 zone. 3. The market trades up to the next zone at 0.9100, so the stop loss is moved to 0.8750. 4. The market reaches the next zone at 0.9330, so the stop loss is moved to 0.9100, and this is where the trade is exited for 575 pips.
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Figure 11.7. This is another example of the ladder exit on the EUR/USD weekly chart. Here we see a bullish kangaroo tail. The market immediately trades higher than the kangaroo tail and reaches the first zone at 0.8750 quite easily. At this stage, the stop loss is moved to breakeven. The market trades higher to reach the zone at the 0.9100 level.
Here, the stop loss is moved to the first zone down at 0.8750. Next, the market makes a move higher and reaches the next zone at 0.9330, so the stop loss is moved to the second zone at the 0.9100 level, and this is where the trade is exited for a gain of 575 pips.
Using the ladder exit will allow the market a “cushion” of one zone.This may seem frustrating, to allow the market to come back and stop out a trade for less profit, but this is the nature of the trailing exit. All trailing exits (including the three-bar exit described further on), have to allow some breathing room, or “cushion” in order to capture the large profits available in trending markets.
Three-Bar Exit The three-bar exit is a unique exit because, unlike the previous exits, it does not involve zones. The three-bar exit gets its name because the exit is based on the price action of the most recent three bars (or candlesticks). The exit is a simple trailing exit based on the lowest low of the previous three candlesticks (for buy trades), or the highest high of the previous three candlesticks (for sell trades).
The naked trader locks in profits by trailing the stop loss behind the lowest low (for buy trades) of the previous three candlesticks. Take the example on the one-hour GBP/AUD chart. This trade is obviously a bullish trendy kangaroo on an excellent zone at 1.5868 (see Figure 11.8).
FIGURE 11.8 The stop loss for the GBP/AUD one-hour trendy kangaroo is first placed below the low of the candlestick.
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The initial stop-loss placement is below the low of the trendy kangaroo.Once the market prints three candlesticks after the trendy kangaroo, the stop loss is moved below the low of the lowest candlestick.
FIGURE 11.9 The three-bar exit applied to the GBP/AUD one-hour chart. Once the market has printed three candlesticks, the stop loss is moved beneath the lowest low of the most recent three candlesticks.
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The lowest of the three candlesticks in Figure 11.9 is the third candlestick, the candlestick immediately after the trendy kangaroo candlestick. The stop loss is moved to just below the low of the candlestick immediately following the trendy kangaroo candlestick.
FIGURE 11.10 The three-bar exit applied to the one-hour GBP/AUD trendy kangaroo trade. The market moves higher, and the stop loss is placed just below the lowest low of the three most recent candlesticks.
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In Figure 11.10, the three-bar exit is applied to GBP/AUD one-hour trendy kangaroo. One more candlestick prints, and so the stop loss is moved higher, this time it is placed below the third most recent candlestick because it has the lowest low at this stage of the trade.
FIGURE 11.11 One more candlestick prints, and the three-bar exit is adjusted once again. This time the third most recent candlestick is again the candlestick with the lowest low, so the stop loss on the GBP/AUD trendy kangaroo trade is placed below the third candlestick.
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In Figure 11.11 the market moves higher once again after another onehour candlestick closes. The GBP/AUD one-hour trendy kangaroo is trending nicely, and the three-bar exit is locking in profits as the market trades higher. The one-hour chart for the GBP/AUD changes drastically as the market makes a strong move downward (see Figure 11.12).
FIGURE 11.12 The most recent candlestick on the one-hour GBP/AUD chart makes a strong move down. The stop loss is placed below this candlestick because it has the lowest low of the most recent three candlesticks.
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At this stage, the candlestick with the lowest low is the most recent candlestick, so according to the three-bar exit rules the stop loss must be placed a few pips below this most recent candlestick.
One more candlestick prints, and the trade survives by a whisker. The new candlestick is slightly lower than the previous candlestick, so the stop loss is placed below this most recent candlestick (see Figure 11.13).
FIGURE 11.13 The GBP/AUD one-hour trendy kangaroo trade survives after the next candlestick prints on the chart. This most recent candlestick now has the lowest low, so the stop loss is placed a few pips below this candlestick.
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The next one-hour candlestick on the GBP/AUD one-hour chart (see Figure 11.14) prints slightly higher.
FIGURE 11.14 The stop loss for the one-hour GBP/AUD trendy kangaroo trade remains the same because the most recent candlestick does not present a lower low.
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The stop loss remains at the same location because this second candlestick still has the lowest low of the most recent three candlesticks.The one-hour trendy kangaroo trade on the GBP/AUD chart is closed out on the next candlestick (see Figure 11.15).
FIGURE 11.15 The next candlestick triggers the three-bar exit stop loss. The most recent one-hour GBP/AUD trades low enough to hit the stop loss, and so the trade is over after a gain of 13 pips.
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The most recent candlestick pushes through the stop loss, and so the trade is closed for a modest gain of 13 pips. Some of the trades that are managed according to the three-bar exit will end up with similar results to this GBP/AUD one-hour trendy kangaroo trade. The three-bar exit is ideal for a strong trending market, but if the market does not continue moving with a strong trend, the three-bar exit will only capture minimal profits. Although this may seem discouraging for some traders (particularly gunners), for runners, who take a long-term perspective, a few losing trades or minimal gains are acceptable. Runners understand that the large gains will come from time to time and make the three-bar exit a worthwhile exit strategy.
Another example of the three bar exit is in order. This time, it is the AUD/JPY daily chart, and the trade set-up is a bearish big shadow.The original placement for the stop loss is just above the high of the bearish big-shadow candlestick (see Figure 11.16).
FIGURE 11.16 The initial stop-loss placement for the daily AUD/JPY bearish big shadow is just above the high of the big shadow.
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The stop loss remains above the high of the big shadow until three more candlesticks print after the bearish big shadow. The stop loss is moved a few pips above the highest high of the three most recent candlesticks.
FIGURE 11.17 According to the three-bar exit, once the third candlestick prints the stop loss may be adjusted. In this case, the first candlestick after the AUD/JPY daily bearish big shadow has the highest high of the three candlesticks, thus the stop loss is placed a few pips above this candlestick.
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As Figure 11.17 illustrates, the highest high of the previous three candlesticks is the candlestick immediately following the big shadow, so the stop loss is placed above this candlestick.
FIGURE 11.18 The most recent candlestick on the daily AUD/JPY chart becomes the candlestick with the highest high. Thus, according to the three bar exit, the stop loss is placed a few pips above the high of the most recent candlestick.
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The next chart (see Figure 11.18) shows four candlesticks after the bearish big shadow. The highest high of the most recent three candlesticks becomes the most recent candlestick. Therefore, the stop loss is placed a few pips above the high of the most recent candlestick. It is important to note that according to the rules of the three-bar exit, the candlestick must close before the stop loss may be moved. Another candlestick prints and the candlestick with the highest high remains the same. The stop loss is not moved because the second most recent candlestick still has the highest high (see Figure 11.19).
FIGURE 11.19 Using the three-bar exit, the stop loss placement on the AUD/JPY daily bearish big shadow trade remains the same after one more candlestick prints.
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FIGURE 11.20 The market makes another move down, but the stop-loss placement on the AUD/JPY daily bearish big-shadow trade remains the same. The stop loss remains a few pips above the high of the third candlestick.
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The next day, themarket takes another fall (see Figure 11.20). The stop loss remains the same, above the third most recent candlestick. The two more recent candlesticks have lower highs, and, according to the three-bar exit, the stop loss placement is above the highest high of the prior three candlesticks.This time the stop loss for the trade is moved once again as shown in Figure 11.21.
FIGURE 11.21 The market prints another small candlestick and the AUD/JPY trade has a new stop loss placement above the third most recent candlestick, according to the three bar exit rules.
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The next candlestick prints and the highest high becomes the third most recent candlestick, so the stop loss is placed a few pips above the high of that candlestick. When using the three-bar exit, if the stop loss is placed above the third candlestick, then it is known that after the next candlestick prints, the stop loss will be moved. Another candlestick prints, and the highest high is once again the third most recent candlestick, so the stop loss is moved a few pips above the high of this third candlestick as is seen in Figure 11.22.
FIGURE 11.22 After a new candlestick prints, the stop loss is placed a few pips above the third most recent candlestick, the candlestick with the highest high of the previous three candlesticks.
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Again, since the stop is above the third candlestick, there will be another stop-loss adjustment once the next candlestick prints.One more candlestick prints, and the new highest high is the most recent candlestick, so the stop loss is placed a few pips above this candlestick (see Figure 11.23).
FIGURE 11.23 The most recent candlestick has the highest high of the three most recent candlesticks, so according to the three-bar exit, the stop loss is placed above this candlestick.
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The market has finally triggered the three-bar exit shown in Figure 11.24 and the trade is over.
FIGURE 11.24 The most recent candlestick trades through the stop loss. The bearish big-shadow trade on the daily AUD/JPY chart has captured 137 pips.
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The most recent candlestick takes out the stop loss. This bearish big shadow on the AUD/JPY daily chart has netted 137 pips by using the three-bar exit.The three-bar exit works best when the market accelerates into a strong trend. As long as the three most recent candlesticks are following the trend, the three-bar exit will trail slightly behind the advancing candlesticks, capturing profit along the way. This exit is ideal for runners who are interested in capturing large profits.
At times, the three-bar exit may be frustrating, some trades will end up as losers, other trades may give back much profit, but if used consistently, this trailing exit will capture big moves. The key to this exit is to use it consistently, for every trade. Runners are like all traders: They never know when the next big trend will pop up. But gunners who apply trailing exits such as the three-bar exit are ready to capture profits from the next trend in the markets.
Managing Exits
A common problem for traders is re-trading the most recent trade. This issue is extremely common for traders struggling with an exit strategy.Traders will take a close look at a recent trade, see where improvements could have been made, and then decide to change things for the next trade.
The problem with this strategy is that every trade is different. The previous trade has nothing to do with the next trade. Every trade is an independent event. When traders fall into this trap of re-trading the previous trade, bad things often happen.
If you have found yourself adjusting your strategy in general, or changing your exit strategy in particular, based on what occurred in the previous trade, you are falling into this trap as well. Perhaps you take a trade and the market runs for several hundred pips in the expected direction, long after you have exited the trade. This may encourage you to change your exit strategy on the next trade. The problem with this is the next trade may not run for several hundred pips, and may only go to the next zone, which means that you will reduce your profitability even further.
Decide which type of trader you are going to be. Either you will be a runner, or you will be a gunner. Stick to one exit philosophy. Decide what makes sense to you. If you are a gunner do not get upset if the market runs for 500 pips after you exit the trade. If you are a runner do not get upset when you get stopped out after the market goes in the expected direction initially. It is important to stay true to your trading beliefs. The best way to do this is to avoid re-trading the last trade. In fact, re-trading the last trade may send you into a cycle of doom—never a fun place for traders. In the next chapter we examine this cycle in detail.
By:Alex Nekritin
The trade exit is the fun part; this is where your money is made. As a trader, this is your payday. When it comes to exits, all traders fit into one of two camps, runners and gunners. Runners and gunners are competing philosophies, and most traders will clearly identify with one or the other. It is important for you to decide right now before you read any further whether you identify with the runners or the gunners. The easiest way to determine which camp you fall into is to think about your answer to this question: Is it more important for you to have a high win rate or is it more important for you to have huge winning trades?
If you would rather have a high win rate, then you will probably have relatively small winners. You may have a high percentage of winners, but the average winning trade will probably be relatively small. If this is your style of trading, then you are a gunner. This is in contrast to the runner because if you are a runner, then you prefer to have huge winning trades. This means that many of your trades may end up as losing trades, or break-even trades, but the few giant winning trades will make up for these losing trades. Runner or gunner, it does not matter which is your.
Runners
The runners are those traders who are looking out for the next big thing.These traders want to capture a large chunk of profit every trade. These traders have a strong sense of confidence. This confidence is unwavering and will not diminish in themidst of a losing streak. The runners are always hopeful that the next trade will end up as a beautiful, long-lasting trade.
The long-running trades are what make profitable trading possible for the runners. Runners look at strong trending charts and think “now that is a trend that I would love to capture.” Runners understand that most of the time the market will not run in an extended trend. Runners are aware that a trading system may not have a high win rate. Runners wish to capture as much profit as possible, but they admit that it is unknown how far the market may move after entering a trade. Runners acknowledge that the market may not move very far, but once in a while the market may go very far and accelerate in a trending market.
Therefore, the win rate is not the most important statistic for runners. Runners are much more excited about the profits that come with the long-lasting trades that capture a trending market. The patience exhibited by runners is extremely difficult for the other group to understand.Gunners have an altogether different perspective on trading.
Gunners
Gunners are a different breed. Winning is everything to gunners. Perhaps many gunners have a difficult time sitting through losing streaks. Or, it may be that gunners find it difficult to watch a trade go from profit to a breakeven result. It may be that gunners are more impatient than runners, but in the end it really does not matter.Gunners may also find profit in naked trading. Gunners, like runners, may decide to trade the kangaroo tail, the big belts, or any other nakedtrading strategy. However, gunners are interested in quick satisfaction.
Patience may not be one of the defining traits for gunners. Gunners understand that under normal circumstances the market is often moving up and down, up and down. Gunners believe the chances of capturing a strong trend are often quite minimal. This is why gunners are fine with small, consistent profits that they extract from the market. After all, gunners understand that these small profits will quickly add up.
Exit Strategies
By now, you understand the respective philosophies of runners and gunners.It does not matter if you decide to adopt the gunner philosophy and find consistent quick profits in the market or if you decide to side with the runners and try to capture a trending market for huge profits. The important thing is that you understand what makes sense to you and that you adopt and maintain this exit strategy in your trading. The first two exit strategies are for the gunners: the zone exit and the split exit. The second two exit strategies are for the runners: the modified split exit and the threebar exit.
Exits for Gunners
Gunners are interested in quick profits. Gunners want to get in and out of a trade, and gunners love winning trades. The zone exit and the split exit are designed to take profits at the most important spots on the chart—the zones. Recall that the zones are those spots on the chart where the market repeatedly reverses. There is another characteristic of the zones that is important for the naked trader.
Zones are also magnets: The market tends to be attracted to these places on the chart. In other words, zones are simultaneously price barriers and price magnets.Exits based on zones take advantage of the fact that zones attract price.
Zone Exit
The zone exit is the basic exit for the naked trader. The naked trader looks to initiate trades at zones, and the naked trader looks to exit trades at these same zones. The basic philosophy of the naked trader is this: The market tends to bounce off zones repeatedly, like a pinball. Therefore, it is perfectly reasonable to look to these zones as potential profit targets.
These zones are the most important places on the naked trader’s chart.Take a look at Figure 11.1, a one-hour chart on the EUR/JPY.
FIGURE 11.1 This is a bearish big shadow on the EUR/JPY one-hour chart. Using the zone exit, this trade makes 48 pips within two candlesticks, a very quick profit.
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By now, you will recognize this as a bearish big shadow. A sell stop below the low of the bearish big shadow netted 48 pips using the simple zone exit. Notice, also, that it only took two candlesticks to achieve this profit target.Here is another example of a zone exit, this time it is the GBP/JPY fourhour chart in Figure 11.2.
FIGURE 11.2 The bullish kangaroo tail on the GBP/JPY four-hour chart makes 86 pips four candlesticks after the trade is triggered. Notice how the market immediately reversed after reaching this zone. The zone exit enables the naked trader to avoid many losing or break-even trades simply because the profit target is often close to the entry price.
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Again, you will now be familiar with the trade setup. In this case it is a bullish kangaroo tail. With a buy stop entry placed just above the high of the bullish kangaroo tail, the target is achieved within four candlesticks. This trade made 86 pips. It is important to note that the zone exit is extremely easy to implement, and it may be applied when the trade is initiated.
In other words, you will know when you place your trade order exactly where the exit will be. There is no managing the trade, there is no need to watch the trade, and,therefore, this is a nice trade exit for you if you do not sit and watch the charts.
Sometimes the market will get very near a zone, and then trade away from the zone. For this reason it is important that you place the profit target near the zone, with sufficient cushion. For sell trades, the profit target should be several pips above the nearest zone, and for buy trades the profit target should be several pips below the nearest zone.
FIGURE 11.3 The AUD/USD four-hour chart shows a nice bullish kangaroo tail.This trade made 69 pips because the profit target was a few pips below where this zone was drawn on the chart. Placing a profit target precisely on the zone would have meant missing out on a profit and watching the market fall down and go against the trade.
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In Figure 11.3 you can see where this rule enabled the naked trader to exit this trade with a profit. The zone exit is a powerful exit, and many gunners find it easy to apply this exit. The split exit will often enable a quick profit, so it is ideal for traders who do not have the patience to wait through a long trade.
Split Exit The problem with the zone exit is that often the market will go much further than the first zone, and this may lead to frustration. Even gunners like to have trades that extend for a long time. The split exit is, therefore, a compromise that gunners may use to allow for the market to go a bit further than the first zone. Like the zone exit, the split exit may be used by those naked traders who are interested in hands-free trading.
To use the split exit, the naked trader must divide the trading position into separate positions. One simple way to do this is to divide the trade in half. So, for instance, if a trade has six lots, a split exit would mean using one target for three lots and a different target for the other three lots.
This is how a split exit is executed: The first zone, the nearest zone to the entry price, is used as a profit target for half the position, and the next closest zone is used as a profit target for the remaining position. Once the market achieves the first profit target, at the nearest zone, the stop loss is moved to break even for the remaining position. This obviously reduces the risk for the remaining position. The position will either hit the second profit target or it will be stopped at breakeven.An example will illustrate how the split exit should be used.
FIGURE 11.4 The AUD/JPY one-hour chart prints a bearish kangaroo tail on an important zone. Using the split exit, the naked trader is able to find 33 pips of profit on the first zone, and an additional 65 pips of profit at the second zone below the entry price.
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In Figure 11.4 there is a bearish kangaroo tail on the AUD/JPY one-hour chart.The market quickly falls to the first zone, 30 pips away, and so half the position bags 30 pips. The remaining half of the position becomes risk-free because the stop loss is now moved to the entry price. The market does retrace, but it does not make it back to the entry price. The market instead falls further, all the way down to the second zone, where the remaining position exited for a profit of 65 pips.
The split exit will not always make additional profit. Some of these trades will end up with a nsmaller win simply because the market will come back and close out the remaining position at breakeven.
FIGURE 11.5 The AUD/NZD daily chart prints a bearish kangaroo tail on an important zone. The split exit enables the naked trader to make 73 pips at the first zone, but the market retraces beyond the entry point for a break-even result on the remaining trade.
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In Figure 11.5, the AUD/NZD daily chart offers a bearish kangaroo tail on a zone. Using a split exit with this trade, the naked trader finds a profit of 73 pips at the nearest zone, but afterwards the market moves higher and hits the breakeven stop loss.The split exit will require more patience than the zone exit. The fact remains that some trades will be stopped at breakeven when following the rules of the split exit.
However, obviously, some trades will also make it to the second zone, and, therefore, the average size of the winning trades will increase. The split exit is, in essence, a compromise, a compromise for the gunners. Most gunners will be unable to apply the exit strategies that are appropriate for the more patient runners.
If you are a gunner but would like to increase the size of your average winning trade, the split exit may be the exit for you. If you are thinking that both the zone exit and the split exit do not take advantage of the strong trending moves that you observe in the markets, you are probably thinking like a runner. Read the next section to see how runners approach their trading exits.
Exits for Runners
Runners see things a bit differently. Runners love bagging the big trade.Runners have incredible confidence in their trading systems. Runners are in it for the long haul. Runners use exit strategies to take advantage of trending markets.The first exit for runners is similar to some of the gunner exits. This exit is called the ladder exit. The second exit for runners is a little bit different because it is not based on the zones. Both of these exits are classified as trailing exits, which simply means that they take advantage of trending markets.
T R A I L I N G E X I T S
An exit strategy that is dynamic, with no fixed exit price. The exit price constantly adjusts with the movement in the market to maximize profit.
An exit strategy that is dynamic, with no fixed exit price. The exit price constantly adjusts with the movement in the market to maximize profit.
All trailing exits are a compromise. There are two parts to the trailing exit. The trailing exit must allow a cushion so the market may move against the position, and the trailing exit must have a line in the sand to capture the profit once the market moves too far against a position.
Both the ladder exit and the three bar exit do best during trending markets.The ladder exit uses zones to identify profit targets, whereas the threebar exit uses an entirely different approach.Ladder Exit The ladder exit is similar to the previous exits in that zones are used to identify profit targets.
The difference, however, is that each zone is a potential profit target. When using the ladder exit, the naked trader never knows where the final exit price will be; this is because the ladder exit allows the market some breathing room. This is how the ladder exit works: Once a trade is initiated, the stop loss is moved in accordance with how far the market has moved. So, for example, if the market moves from the entry price to the closest zone, then the stop loss is moved to breakeven.
Once the market moves further to the second closest zone to the entry price the stop loss is moved from breakeven to the first zone, and so forth. The easiest way to see how the ladder exit is executed is to look at an example.
FIGURE 11.6 This is a bearish big belt on the GBP/USD four-hour chart. 1. The stop loss is above the high of the bearish big belt. 2. The stop loss moves to breakeven once the market reaches the first zone. 3. The stop loss moves to the first zone once the market reaches the second zone, this is where the trade is exited for 128 pips.
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Figure 11.6 is the GBP/USD four-hour chart. A bearish big belt prints on the 1.6460 zone.The market trades down to the 1.6270 zone, so the stop loss is moved from the high of the big belt candlestick to breakeven.
Then the market hits the next zone at 1.6135, so the stop loss is moved to the 1.6270 zone. The market turns around and trades back up to the 1.6270 zone, where the trade is exited for a gain of 128 pips.Patience is needed to employ the ladder exit. Take a look at
FIGURE 11.7 The ladder exit on a weekly EUR/USD bullish kangaroo tail. 1. The stop loss is first placed below the low of the kangaroo tail. 2. The stop loss is moved to breakeven once the market reaches the 0.87500 zone. 3. The market trades up to the next zone at 0.9100, so the stop loss is moved to 0.8750. 4. The market reaches the next zone at 0.9330, so the stop loss is moved to 0.9100, and this is where the trade is exited for 575 pips.
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Figure 11.7. This is another example of the ladder exit on the EUR/USD weekly chart. Here we see a bullish kangaroo tail. The market immediately trades higher than the kangaroo tail and reaches the first zone at 0.8750 quite easily. At this stage, the stop loss is moved to breakeven. The market trades higher to reach the zone at the 0.9100 level.
Here, the stop loss is moved to the first zone down at 0.8750. Next, the market makes a move higher and reaches the next zone at 0.9330, so the stop loss is moved to the second zone at the 0.9100 level, and this is where the trade is exited for a gain of 575 pips.
Using the ladder exit will allow the market a “cushion” of one zone.This may seem frustrating, to allow the market to come back and stop out a trade for less profit, but this is the nature of the trailing exit. All trailing exits (including the three-bar exit described further on), have to allow some breathing room, or “cushion” in order to capture the large profits available in trending markets.
Three-Bar Exit The three-bar exit is a unique exit because, unlike the previous exits, it does not involve zones. The three-bar exit gets its name because the exit is based on the price action of the most recent three bars (or candlesticks). The exit is a simple trailing exit based on the lowest low of the previous three candlesticks (for buy trades), or the highest high of the previous three candlesticks (for sell trades).
The naked trader locks in profits by trailing the stop loss behind the lowest low (for buy trades) of the previous three candlesticks. Take the example on the one-hour GBP/AUD chart. This trade is obviously a bullish trendy kangaroo on an excellent zone at 1.5868 (see Figure 11.8).
FIGURE 11.8 The stop loss for the GBP/AUD one-hour trendy kangaroo is first placed below the low of the candlestick.
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The initial stop-loss placement is below the low of the trendy kangaroo.Once the market prints three candlesticks after the trendy kangaroo, the stop loss is moved below the low of the lowest candlestick.
FIGURE 11.9 The three-bar exit applied to the GBP/AUD one-hour chart. Once the market has printed three candlesticks, the stop loss is moved beneath the lowest low of the most recent three candlesticks.
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The lowest of the three candlesticks in Figure 11.9 is the third candlestick, the candlestick immediately after the trendy kangaroo candlestick. The stop loss is moved to just below the low of the candlestick immediately following the trendy kangaroo candlestick.
FIGURE 11.10 The three-bar exit applied to the one-hour GBP/AUD trendy kangaroo trade. The market moves higher, and the stop loss is placed just below the lowest low of the three most recent candlesticks.
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In Figure 11.10, the three-bar exit is applied to GBP/AUD one-hour trendy kangaroo. One more candlestick prints, and so the stop loss is moved higher, this time it is placed below the third most recent candlestick because it has the lowest low at this stage of the trade.
FIGURE 11.11 One more candlestick prints, and the three-bar exit is adjusted once again. This time the third most recent candlestick is again the candlestick with the lowest low, so the stop loss on the GBP/AUD trendy kangaroo trade is placed below the third candlestick.
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In Figure 11.11 the market moves higher once again after another onehour candlestick closes. The GBP/AUD one-hour trendy kangaroo is trending nicely, and the three-bar exit is locking in profits as the market trades higher. The one-hour chart for the GBP/AUD changes drastically as the market makes a strong move downward (see Figure 11.12).
FIGURE 11.12 The most recent candlestick on the one-hour GBP/AUD chart makes a strong move down. The stop loss is placed below this candlestick because it has the lowest low of the most recent three candlesticks.
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At this stage, the candlestick with the lowest low is the most recent candlestick, so according to the three-bar exit rules the stop loss must be placed a few pips below this most recent candlestick.
One more candlestick prints, and the trade survives by a whisker. The new candlestick is slightly lower than the previous candlestick, so the stop loss is placed below this most recent candlestick (see Figure 11.13).
FIGURE 11.13 The GBP/AUD one-hour trendy kangaroo trade survives after the next candlestick prints on the chart. This most recent candlestick now has the lowest low, so the stop loss is placed a few pips below this candlestick.
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The next one-hour candlestick on the GBP/AUD one-hour chart (see Figure 11.14) prints slightly higher.
FIGURE 11.14 The stop loss for the one-hour GBP/AUD trendy kangaroo trade remains the same because the most recent candlestick does not present a lower low.
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The stop loss remains at the same location because this second candlestick still has the lowest low of the most recent three candlesticks.The one-hour trendy kangaroo trade on the GBP/AUD chart is closed out on the next candlestick (see Figure 11.15).
FIGURE 11.15 The next candlestick triggers the three-bar exit stop loss. The most recent one-hour GBP/AUD trades low enough to hit the stop loss, and so the trade is over after a gain of 13 pips.
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The most recent candlestick pushes through the stop loss, and so the trade is closed for a modest gain of 13 pips. Some of the trades that are managed according to the three-bar exit will end up with similar results to this GBP/AUD one-hour trendy kangaroo trade. The three-bar exit is ideal for a strong trending market, but if the market does not continue moving with a strong trend, the three-bar exit will only capture minimal profits. Although this may seem discouraging for some traders (particularly gunners), for runners, who take a long-term perspective, a few losing trades or minimal gains are acceptable. Runners understand that the large gains will come from time to time and make the three-bar exit a worthwhile exit strategy.
Another example of the three bar exit is in order. This time, it is the AUD/JPY daily chart, and the trade set-up is a bearish big shadow.The original placement for the stop loss is just above the high of the bearish big-shadow candlestick (see Figure 11.16).
FIGURE 11.16 The initial stop-loss placement for the daily AUD/JPY bearish big shadow is just above the high of the big shadow.
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The stop loss remains above the high of the big shadow until three more candlesticks print after the bearish big shadow. The stop loss is moved a few pips above the highest high of the three most recent candlesticks.
FIGURE 11.17 According to the three-bar exit, once the third candlestick prints the stop loss may be adjusted. In this case, the first candlestick after the AUD/JPY daily bearish big shadow has the highest high of the three candlesticks, thus the stop loss is placed a few pips above this candlestick.
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As Figure 11.17 illustrates, the highest high of the previous three candlesticks is the candlestick immediately following the big shadow, so the stop loss is placed above this candlestick.
FIGURE 11.18 The most recent candlestick on the daily AUD/JPY chart becomes the candlestick with the highest high. Thus, according to the three bar exit, the stop loss is placed a few pips above the high of the most recent candlestick.
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The next chart (see Figure 11.18) shows four candlesticks after the bearish big shadow. The highest high of the most recent three candlesticks becomes the most recent candlestick. Therefore, the stop loss is placed a few pips above the high of the most recent candlestick. It is important to note that according to the rules of the three-bar exit, the candlestick must close before the stop loss may be moved. Another candlestick prints and the candlestick with the highest high remains the same. The stop loss is not moved because the second most recent candlestick still has the highest high (see Figure 11.19).
FIGURE 11.19 Using the three-bar exit, the stop loss placement on the AUD/JPY daily bearish big shadow trade remains the same after one more candlestick prints.
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FIGURE 11.20 The market makes another move down, but the stop-loss placement on the AUD/JPY daily bearish big-shadow trade remains the same. The stop loss remains a few pips above the high of the third candlestick.
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The next day, themarket takes another fall (see Figure 11.20). The stop loss remains the same, above the third most recent candlestick. The two more recent candlesticks have lower highs, and, according to the three-bar exit, the stop loss placement is above the highest high of the prior three candlesticks.This time the stop loss for the trade is moved once again as shown in Figure 11.21.
FIGURE 11.21 The market prints another small candlestick and the AUD/JPY trade has a new stop loss placement above the third most recent candlestick, according to the three bar exit rules.
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The next candlestick prints and the highest high becomes the third most recent candlestick, so the stop loss is placed a few pips above the high of that candlestick. When using the three-bar exit, if the stop loss is placed above the third candlestick, then it is known that after the next candlestick prints, the stop loss will be moved. Another candlestick prints, and the highest high is once again the third most recent candlestick, so the stop loss is moved a few pips above the high of this third candlestick as is seen in Figure 11.22.
FIGURE 11.22 After a new candlestick prints, the stop loss is placed a few pips above the third most recent candlestick, the candlestick with the highest high of the previous three candlesticks.
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Again, since the stop is above the third candlestick, there will be another stop-loss adjustment once the next candlestick prints.One more candlestick prints, and the new highest high is the most recent candlestick, so the stop loss is placed a few pips above this candlestick (see Figure 11.23).
FIGURE 11.23 The most recent candlestick has the highest high of the three most recent candlesticks, so according to the three-bar exit, the stop loss is placed above this candlestick.
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The market has finally triggered the three-bar exit shown in Figure 11.24 and the trade is over.
FIGURE 11.24 The most recent candlestick trades through the stop loss. The bearish big-shadow trade on the daily AUD/JPY chart has captured 137 pips.
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The most recent candlestick takes out the stop loss. This bearish big shadow on the AUD/JPY daily chart has netted 137 pips by using the three-bar exit.The three-bar exit works best when the market accelerates into a strong trend. As long as the three most recent candlesticks are following the trend, the three-bar exit will trail slightly behind the advancing candlesticks, capturing profit along the way. This exit is ideal for runners who are interested in capturing large profits.
At times, the three-bar exit may be frustrating, some trades will end up as losers, other trades may give back much profit, but if used consistently, this trailing exit will capture big moves. The key to this exit is to use it consistently, for every trade. Runners are like all traders: They never know when the next big trend will pop up. But gunners who apply trailing exits such as the three-bar exit are ready to capture profits from the next trend in the markets.
Managing Exits
A common problem for traders is re-trading the most recent trade. This issue is extremely common for traders struggling with an exit strategy.Traders will take a close look at a recent trade, see where improvements could have been made, and then decide to change things for the next trade.
The problem with this strategy is that every trade is different. The previous trade has nothing to do with the next trade. Every trade is an independent event. When traders fall into this trap of re-trading the previous trade, bad things often happen.
If you have found yourself adjusting your strategy in general, or changing your exit strategy in particular, based on what occurred in the previous trade, you are falling into this trap as well. Perhaps you take a trade and the market runs for several hundred pips in the expected direction, long after you have exited the trade. This may encourage you to change your exit strategy on the next trade. The problem with this is the next trade may not run for several hundred pips, and may only go to the next zone, which means that you will reduce your profitability even further.
Decide which type of trader you are going to be. Either you will be a runner, or you will be a gunner. Stick to one exit philosophy. Decide what makes sense to you. If you are a gunner do not get upset if the market runs for 500 pips after you exit the trade. If you are a runner do not get upset when you get stopped out after the market goes in the expected direction initially. It is important to stay true to your trading beliefs. The best way to do this is to avoid re-trading the last trade. In fact, re-trading the last trade may send you into a cycle of doom—never a fun place for traders. In the next chapter we examine this cycle in detail.
By:Alex Nekritin
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