I came across this question on the DayTrading subreddit the other day.
In this case the trader thinks he’s exiting early because he’s worried about a big loss. Big losses, of course, are uncomfortable. You have to be able to tolerate them to catch the profitable trades. The problem is not the occasional big loss – the most difficult part of trading is that you can’t predict when there will be a large concentration of losing trades (a drawdown).
If you find yourself deviating from your plan and exiting your positions too early or too late it could be one of two things that’s occurring:
- You are trading too big
- You don’t have confidence in your trading plan (or you don’t have one to begin with)
If the trader is mostly comfortable taking losses and is still worried about big losses then he should reduce his trading size to something where he can think more clearly about each trade.
Just as common a situation though is that the trader hasn’t put in the work and research required to understand their exit strategy. If you find yourself second guessing your plan and overriding your pre-planned exit then the best course of action is to test different exit scenarios and see which exit strategy works best over a large number of your trades.
If you don’t know which exit strategies work best for your strategy then you should drop what you’re doing and do the research required to come up with that answer.
Here’s an example from one of my trading strategies. This strategy enters early in the day and holds the trades until the end of the trading day if a stop loss or target isn’t hit. The result is a lot of waiting for positions to play out. Any one trade looks erratic and obvious in hindsight but I know that if I exit earlier than the end of the day I will be leaving money on the table across a large number of trades. There is no guesswork on my part – the numbers don’t lie.