A complete trade needs both an entry and an exit. While this is obvious, it needs repeating because a lot of traders are good at getting into trades, but hopelessly woeful at getting back out of them. Getting out of losing trades at the right time can make a make a huge difference to a trader’s bottom line.

Trader Psychology And The Need For An Exit Plan
I wouldn’t say that I know a lot about trader psychology at all, so I did a little snooping around the internet to gather some info and found three interesting characteristics about us amateur traders:

1. We make more winning trades than losing trades.
2. The average time we spend in a losing trade is two-three times the length of the average time we spend in a winning trade.
3. Our average loss is slightly larger than our average gain.

These findings suggest that most of us are breakeven traders; not making the profits that point 1 suggests we could. Although I try to minimise it, I’m as guilty as the next trader of running losses (point 2) in the painful hope that the position turns around. More often than not, the loss magnifies (point 3) before I face reality and close out the position.

A relatively simple method to minimise the problems that points 2 and 3 pose is to have an exit strategy for losses before opening the trade. Profitable traders know how they will exit their trades before they even enter them. The reason to plan beforehand is because traders are normally comfortable entering a trade, but seldom is this the case when exiting. When there is an unrealised loss staring us in the face we become less able to use sound judgment. Having an exit strategy for losses and actually implementing it is essential to all successful disciplined traders.

Set A Stop Loss Order
With paddypowertrader, when you open a trade, a stop loss order is automatically generated. In most cases, the system assigns the stop level as 80% of the Max CGSL, which is the required margin to enter the trade. The aim of this is to protect the trader but the downside is that it is an arbitrary level that is very unlikely to be the optimal stop loss level. What all traders should go is go in there and change that stop loss order to a level that is more appropriate to the trade. For example, the Max CGSL for the Daily FTSE 100 is 125 so if you traded FTSE, a stop loss order would be created 100 (80% of 125) away from where you got in. However a stop loss only 60 points away may be a better level so you should change your stop loss level to that.

In general, if you’re day trading, you may want to narrow your stop loss and if you’re holding for a few days, you may want to widen your stop loss. Personally I prefer setting tighter stops. With the way I trade, I plan for my trades to go my way straight away. If they don’t, I want to get out. Of course this sometimes results in me getting stopped out when a wider stop would have been a better option, but overall, this way minimises my losses.

Do Not Subsequently Widen Your Stop Loss Order!
After setting your stop loss level, further widening of it later on is one of the biggest mistakes in spread betting, and unfortunately, also one of the most common.

I must admit that I frequently widened my stop loss level when I first started trading in the hope that the position would reverse. But in my experience it’s definitely not worth it and has led to me taking losses double what they should have been. These days I’m not as bad. While everyone has different methods to overcome this bad habit, this is how I did it. When I open my position, I put in a lot of work coming up with a good stop loss level. Later, if my position is nearing that level and I’m tempted to widen it, I suppress my irrational thoughts by remembering that I put a lot of effort into finding that original level. I’m not saying that’s a brilliant method, but it’s working for me.

Unless you can come up with some very solid logically reasoning behind widening you stop loss level, don’t do it. More often than not, it will lead to a greater loss. If you’re about to be stopped out, take the hit, wipe the slate clean and move on to the next trade.

Getting Out Before The Stop Loss Is Hit
Although all paddypowertrader trades have a stop loss attached to them, you obviously don’t have to wait until the stop loss is hit before getting out the trade. Ideally you would be smart enough to realise when a trade is going against you and have closed out long before the stop is hit.

The easiest way to do this is to revert back to the original reason you got into the trade. If that reason is still valid and relevant, then stay in the trade. But if it is a busted reason, then it’s time to get out. There’s no long-term profit to be made from straight gambling on the way the markets will go. Just get out and start again on a new trade. Avoid getting stopped out and losing those valuable extra points.

For example, let’s say that the chart above is GBP/USD and UK Industrial Production is about to be released. I fancy that the data will be worse than expected, so I place a short trade just before figure is released. I do my analysis and think that a stop loss just above a resistance level is a good place. But let’s say Industrial Production comes in way above expectations, a disaster for my short trade. This leaves me with two options:

1. I can leave the trade open and pray that the stop loss doesn’t get triggered.
2. I can close the trade as my reason for getting is now gone i.e. my worse than expected expectation actually came in better than expected.

As is nearly always the case, option 2 is the better choice. If I had closed out a few candlesticks after the data was released, I would have saved myself all those losses that the further up move would have caused. Moral of the story, cut your losses and move on.

Conclusion
I’ll agree that ‘cut your losses and let your profits roll’ is one of the most over used clichés in spread betting. But it is crucially important and is a lot easier to say than to do. However, with a bit more focus on cutting losses, I’m nearly certain that you’ll become a more profitable trader.