In this article we are going to discuss how we use a two part exit strategy for better price action results. While learning where and when to enter a trade is extremely important, we believe that we have found a way to profit on our entries more often than not, simply by having an improved two part exit strategy that helps boost our win percentages, thus putting more profits into our pockets. To understand why we do this, it’s important that you understand that scalping in the ES and other markets has become very popular.
Scalping has become so popular in the mini S&P (ES) that we now know and understand that the ideal scalp target is 4 ticks or one full point. Therefore, our target for the first portion of our trade will always be one point in the ES. These targets vary from market to market, but we mostly trade the ES, so for the remainder of this article, you should consider that we are talking about the ES in our examples and illustrations.
Many of you may not quite understand what we mean by a two part exit strategy as well, so we will explain this strategy in more detail so that everyone is on board with what we are attempting to do. When we talk about a two part exit strategy, we are simply choosing at least two profit targets and exiting a portion of our trade at the first profit target, and then exiting the remainder of our trade at a second profit target. You could choose to have multiple targets as well, so you might have a 3, 4 or even 5 part trade depending on your personal choices. Understand too, that even though we are discussing the ES and trading futures contracts, these strategies work in stocks, forex and any other markets that you can trade as well.
There are many different ways to manage the safety stop on the remaining portion of the trade after exiting at target one, but normally we will move our safety stop to our original entry point so that we are guaranteed to make money on the trade no matter what happens with the remaining contracts. Occasionally in a strong trend, we might use our profits in the first portion of our trade to give the second portion more room to run, so if we choose to go that route, we only move the safety stop close enough to the original entry point to insure we can’t lose any money on the trade as a whole.
Both stop strategies have their pros and cons, but we prefer using the first example in most cases, so that we make money on every trade that moves at least far enough in our favor to give us a profitable scalp. In fact, we call this technique our “scalp and run” technique, because we scalp out of part of the trade, then move our stops to break even on the rest of the trade in the hopes that the remaining portion will run much further in our favor for bigger profits, thus we also call the remaining portion of our trade “runners.”
These two part exit strategies are really nothing more than combining scalping and swing trading into a single strategy, so that we get the best of both worlds. Just as importantly, once any of our trades move at least far enough to scalp out, we then no longer have any more risk of losing money in that trade. Think about how many times you have had a trade that has moved nicely in your direction with profits, only to watch that trade turn into a losing trade in the end. Well, this strategy solves or eliminates that problem if you use proper discipline when putting it into practice. The most important thing we want you understand here is that your exit strategy can be just as important as your entry strategy, so you need to have a good exit plan in place before taking any trade.
Below is an excerpt we took from a recent article that talks about the importance of a good exit strategy. While this article is specifically discussing Forex trades, this is irrelevant really, as the information translates to stocks and futures as well. Below is what the article at www.theforexarticles.com had to say.
In Forex trading, the exit strategy really is very important. Many people spend all of their time developing a winning system, and then once they’ve done so they will employ a strict stop loss policy to minimize their losses. However they will then neglect the exit strategy because they are just happy to be making some money, but in the long run you really do need to develop an exit strategy that will maximize your gains.
One of the very best strategies you can use is the two part exit strategy. This is the exit strategy I use myself when I’m trading my 4 hour trading system, and it’s arguably the main reason why this system is so profitable.
I mainly trade the GBP/USD, EUR/USD and USD/JPY pairs using this method and my exit strategy is always the same. As soon as the position is in profit by 50 points (or 40 points if trading the USD/JPY pair) I will close half the position and let the other half run, moving my stop loss up to break-even.
This way not only do you guarantee a profit from nearly every trade you enter, but you can also get yourself into a free trade position with the second half of the position very early on, so you can hold out for the really big gains if you so wish.
The great thing about this strategy is that even if a trade doesn’t work out, it will nearly always move at least 50 points in your favor before reversing, so you will often profit from the bad trades as well as the good ones. You can read the rest of the original article here.
We liked this article because we tend to agree with the author in that once a trade in the ES moves far enough that you can scalp out with 4 ticks, you are then guaranteed to make money on the trade, and you no longer have any risk in the trade after that point either. The quicker you can remove any risk from a trade, the quicker you can improve the odds that you will not lose money. A large factor in trading success is directly related to discipline, so why agonize and suffer from mental mistakes that come from not knowing if a trade is going to be a winner or not, many times long after you have seen a good profit? You can reduce the issue of fear very quickly by using a two part exit strategy, and once you reduce your fear of losing, you can think much clearer and you will make fewer trading mistakes! At the same time, you don’t give up the opportunity to be in on the best trades that often go much further than 4 ticks. It’s our opinion that this two part exit strategy is the best of both worlds.
If you are interested in learning more about how we trade with price action strategies, then you need to spend some time reading all of our many trading articles here on our website. Once you feel you are ready to get serious about price action trading, you can find more information at http://priceactiontradingsystem.com/pats-price-action-trading-manual/.