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
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.