Exiting trades too early is something many of you struggle with on a regular basis. I know for me, this was one of the most difficult trading mistakes to overcome. How many times have you exited a trade manually for a either a small win or a small loss and then the next day felt like slapping yourself in the face for doing so? I’m willing to bet it’s been more than a few.
This article is for those of you who have difficulty holding onto trades and who exit winning trades too soon or close losses before they actually hit your stop loss, time and time again.
There is usually a mix of contributing factors that cause traders to exit trades too early. It may be due to your trading process, trading psychology (mindset), personal belief systems, recency bias or some combination of those.
The most common types of premature trade exits that lead to regret are the following:
- Exiting a trade at break even constantly due to fear of loss, only to watch a large portion of these trades become winners. (Breakeven is actually a loss because of the spread or commission you pay to the broker!)
- Exiting a trade for a small profit but well before your planned profit target because you fear the market will reverse, only to watch the trade go on to hit your initial target and more.
- Exiting a standard trade at a partial loss for whatever reason you can come up with, well before the stop loss is reached, only to watch the trade go on to be a winner.
- Inability to pyramid into positions (add to winning positions), and constantly exiting these larger positions, fearing the market will reverse.
The Four Main Contributing Factors to Early Trade Exits
1. Improper Trading Process and Poor Understanding of Market Realities
The most common reason traders exit trades too early is that they simply don’t really know what they’re doing. They are trading with real money before actually having developed a concept of what their overall trading approach is and how to properly function in the market in regards to entries, exits and trade management.
If you are over-involved with your trades, sitting there all day and night staring at the charts, you’re probably going to end up screwing up the exits. Traders who have not yet learned to set and forget and ACTUALLY forget their trades after entering them, are the ones who tend to exit trades too early all the time.
If you haven’t yet learned the importance of letting the market take you out and how to do it, you really need to, asap. By letting the market take you out of your trades you are trading in-line with the market and not fighting it or trying to control it. This is the right way to manage a trade exit. You cannot predict which trades will be big winners, but by letting the market take you out, you will position yourself to take advantage of big moves when they occur. Catching big moves in the market is how fortunes are made, not by taking tiny, emotionally-charged winners.
It’s important to remember that trades go further than you think, generally speaking. This means, a good move or trend can run on much longer than you think it can. Whilst the amateurs / losers are continuously trying to predict the trend change, the professionals are happy to take “chunks” out of the market as it consistently trends higher or lower.
One of the biggest culprits of early trade exits is traders risking too much money per trade. When you over-leverage your account you are naturally more nervous and sensitive to every tick for or against your position. You imagine every move against you is the end and every move in your favor is money you need to secure; hence resulting in exiting too early! You need to reduce your dollar risk per trade until your emotions are in-check and you are able to fall asleep without worrying about your trades.
2. Recency Bias
Recency bias is a phenomenon of human psychology that essentially says our most recent experiences have more of an effect on our behavior than older experiences do. If you haven’t already done so, check out my article on recency bias in trading to learn more.
What we are concerned with here is how recent losses in trading or even other negative recent experiences can work to reinforce overly-conservative or defensive feelings in the market, in other words, they can make you fearful.
Traders often get overly-influenced by their recent trades, so if they’ve had a few losses in a row they start getting scared and start seeing the market as more risky than it may be and they start losing faith in their trade edge (very dangerous). It’s critical to remember that your trading edge materializes only over a large sample size of trades and you can never know for sure WHICH trade will be a winner and which will be a loser, until it’s over of course. Hence, to let your last trade or even your last several trades influence your feelings and behavior for your next trade, is simply not productive or logical.
3. Trading Psychology (mindset)
Not having the right mindset about trading and not understanding key realities of how markets move, is something that will definitely contribute to exiting trades too early.
Many people come into trading thinking they will get rich quick and they even quit their jobs before they’re actually making money trading, because they’re “so sure” they will making a living trading.
The truth is, only about 10% of traders survive long-term, and if you want to be one them you’ve to act and behave differently than the other 90%. How do you do that, you ask? Well, behavior is the result of mindset. Your mindset influences your habits and your habits essentially are what make or break you in the market. So, it all starts with having and maintaining the proper trading mindset.
You’ve got to accept that slow and steady wins the race and that a low frequency trading approach is how you making money “fast”. The more you try to make money, the more you will lose. Trading success is the result of focusing on trading performance; being consistent and doing all the little things right day in and day out so that there are no huge swings in your equity curve. Once you truly accept these things your mindset will be much closer to where it needs to be to become a successful trader.
4. Belief Systems and Past Experiences in Life
Many traders come into the market almost expecting it to not work out for them. They think self-deprecating things like “Well, I’ve always been poor so I will probably keep being poor”, especially after they have a losing trade or two. You cannot let negative thoughts infect your mindset or they will lead to negative emotions and poor trading habits that result in more losing!
Like it or not, what you believe about many different topics can and will have an influence on how you think about money, trading and wealth, and of course that can negatively influence your trade exits. If you are a very skeptical or negative type of person or someone who doesn’t believe that people should make money through speculation (for whatever reason) then you will have a hard time letting your trades roll into big winners. This doesn’t even have to be a conscious thing, it can be something subconscious that is affecting your decisions in the market.
The bottom line, is that to trade successfully you need to look inward and really become a student of not just the markets, but of yourself, and then you need to master both. If you do not master yourself and your own faulty thinking and logic, I promise you won’t make money in the markets no matter how good a trader you are. Likewise, if you don’t master your trading strategy and truly get in-tune with the markets you trade, you will also not make money trading.
You need to come into trading as an “empty slate” and not be skeptical of those who are teaching you or who seem to know more than you. Yes, traders do make a lot of money from speculating, not all, but some and my goal is to help you be one of the “some” who do, but I can’t help you if you don’t forget everything you thought you knew about trading behind and approach this with an open mind.
How to Prevent Early Trade Exits
Eliminating the mistake of early trade exits isn’t that difficult, it really just takes a bit of education combined with some good ole’ fashioned self-discipline. I can help you with the former but the latter is truly in your hands (I can’t force you to be disciplined).
The best way to avoid exiting trades too early is to have a trading plan that lays out your trade exit strategy and then sticking to it, no matter what. You will need to understand why set and forget trading is so powerful and be able to walk away from the market when your trades are live. Find a distraction, get a hobby, etc. the cardinal sin of trading is watching the screens too much especially with a live trade on.
Other things that can help are, having a trading journal where you record all your trades and the results, this is something that will help to keep you accountable as you trade. Having some trading affirmations that you read regularly will also help to remind you of the core principles you need to follow as well as work to train your brain in proper trading psychology and procedures.
Avoiding common early trade exit scenarios
Next, I want to drill-down and get a bit more specific by discussing some common problems that affect traders in regards to exiting trades too soon and provide some insight that might help. Now, this isn’t a perfect science, so keep that in mind, but I am trying to help you by sharing what I have learned over 18 years in the markets…
Exiting a trade a break even constantly due to fear of loss.
Losing happens. Especially in trading. You’re going to have a losing trades, that is a given. The question is how well prepared are you for them and have you learned to lose properly? Yes, there is a proper and improper way to lose trades, read the previously linked text if you don’t yet know the difference. Fear is the enemy of trading success and if you are in a state of constant fear, you’re probably going to mess up your trade exits on a regular basis.
Expect to lose 1R (1 times risk) on every trade you take and give the trade room to breathe by using a wide stop loss if necessary. First, you determine what your 1R risk is per trade; what amount are you comfortable with losing on any given trade? Then, when you find a suitable trade setup, you place your stop loss properly and then you adjust your position size to maintain that 1R risk. Once the trade is live, you say “OK”, I am fine if I lose because I am comfortable potentially losing the amount I’ve risked and I know for me to possibly win I have to leave the trade alone and the let the market do it’s thing by simply backing off and leaving the screens alone. You might think by exiting at breakeven you’re avoiding a loss, but you are also potentially avoiding a win! You need to give every trade a chance to work in your favor. Accept that there is risk in trading and manage that risk properly, don’t be afraid of it!
Exiting a trade for a small profit, but well before your planned profit target.
I get it, I do. You get up a decent amount of money and you think “I really should take this profit so this trade is a winner”. But in the grand scheme of things, you won’t survive on just little winners, even 1R winners aren’t enough to really make money over the long-run. You need 2R winners, 3R winners and a few “home runs” in the mix to really have a chance at long-term trading success.
You have to ignore the temptation to exit a trade for a small profit just because you see a “1 hour pin bar against your position”. What time frame did you take the trade on? The daily? Then why are you looking at the 1 hour to exit?! Stick with the plan, man! Don’t panic and don’t take small winners all the time because small winners are easily erased by normal sized 1R losing trades. You have to have patience if you want to hit big winning trades, you need to give every trade room and time to grow.
Now, that isn’t to say there isn’t a time and place for a 1R winner, because certainly it may make sense sometimes. But if you are thinking you will get ahead by chronically taking small winners, you are playing a game of slow, painful defeat my friend.
Exiting a trade at a partial loss for whatever reason you can come up with.
Ever hear of “death by a thousand cuts”? Many traders kill their trading accounts by taking many small losses. Sure, it feels better than taking a bigger or standard 1R loss, but when you manually close out a trade for a small loss, before it has reached your stop loss, what you are also doing is voluntarily eliminating the opportunity the original trade idea presented, before it’s actually been eliminated. The market will show you if you were wrong or right given enough time, you need to allow it to do that. You have no idea where the market will go once your trade is live, you only know that you had a trade idea and that idea represents your edge. You have provided a stop loss for the trade that is (should be) at a point on the chart that would logically nullify your trade idea IF price reaches it. Don’t be swayed by the intraday price movement and tempted to close the trade out early just because your emotions are getting the better of you. Stick. To. The. Plan.
Inability to pyramid into positions (add to winning positions), fearing the market will reverse.
How do you create real wealth from trading? By taking advantage of those rare times when one of your favorite markets is really trending strongly. I am talking about those trends that just seem to keep going in one direction with little to no pull backs. Many traders struggle with these moves because they seem almost “unreal” or “too good to be true”. But, they can and do happen and you need to really take advantage of them to build your account and put yourself ahead.
If you haven’t already done so, read my article on how to pyramid into trades to learn more about how this is done. There is a method to it, but essentially you are adding to winning positions at logical points so as to “snowball” your initial 1R risk into a much much larger risk reward winner. One good winner like this year can literally be the difference between a losing year or a very lucrative year for many traders.
You can’t be afraid and think yourself out of big, profitable moves in the market. It helps to understand how to read the price action and the footprint of money on the charts so that you can identify when a market is really trending powerfully and might be ripe for pyramiding.