Trade Exit Techniques
As part of any winning spread betting strategy, you must have a set way of managing your trade exits. There are a number of different approaches to how this can be done and it is up to you to find one that suits. Let’s examine some of these approaches in a little more detail.
Stop Loss
In previous articles we’ve discussed why initial stop losses are so important and how to choose an appropriate price level for them. This stop loss covers the worst possible trade outcome which is your maximum loss. If your spread betting company offers them, you can pay a premium to have a guaranteed stop loss, otherwise your stop loss is limited to being the next traded price after your stop is executed. In the event of price gapping through your stop loss, this may be markedly different to the stop price.
Profit Target or Trailing Stop?
When entering the trade it is good to have a rough idea of how far your instrument might travel. Some spread betters like to put a profit target in the market, others prefer to let it run indefinitely and trail a stop behind the price movement.
I like to look at what price action is telling me. If we are long in a stock and it is coming up to a level of prior resistance, then I will monitor the progress of that stock very carefully. If it shows the slightest sign of reversing, then I’m out of the bet. If the stock spikes up in a blow out move, I’ll exit the bet. Blow outs spikes (especially on volume) often indicate the end of a trend.
Personally I prefer to not use set profit targets, but for some people they are useful tools to shield themselves from emotional decisions. Placing your stop and your profit target in the market straight away by using an OCO order means that you’ll never be trying to second guess what the market might do (or not do) during the trade. When there is money at stake it is often hard to remain emotionally detached.
Break Even Point
The next area to consider is how you handle the break even point. Let’s say we are long in GBP/USD with a 10 point stop. Price has moved through the break even point and we are in profit. Personally speaking, I am in favour of minimising the profits that I give back to the market and I like to protect myself against any losses as quickly as possible. I’d therefore move my stop loss up to the break even point once price had gone about 10 points or so in my favour. In the long run this may mean that I get stopped out for a zero bet every now and then, but it fulfils an important role in capital protection.
Time Period Stop
Finally, you need to consider whether or not you will use a time period stop. If your instrument has not moved significantly for a number of days, would your money be better placed elsewhere?
Try some of these techniques in your own spread betting practice. Testing your strategy is the key to success and different aspects of the trade exit will have an impact on your profitability.