May 30: Let the Good Times Run - How To Always Make Money with this Simple Technique
The best way to maximize your profits is to be prepared to give some back to the market. When most traders first hear this, they are a little taken aback. Why would you give any of your profits back to the market? Because you are never going to be able to exit right at the peak of the trend. But you can still stay with the trend as it develops, and let your profits run. Then, when the price turns, you can exit.
Traditionally, an inexperienced trader will exit a position once they see a little bit of a profit in their trading account. They want to crystallize that profit immediately. People don`t like to lose, and they believe that those profits are their profits, and once they have them, they don`t want to risk giving them back to the market.
This strategy is doomed to failure, since it breaks one of the cardinal rules of trading: To let your profits run. It is always wise to implement cardinal rules like these, but how? Well, after you`ve defined your trading float, set your maximum loss, calculated your stop losses, and also calculated your position sizing – you can determine how to handle profits.
Once you`ve set your initial stop loss, you`ve ensured a mechanism to cut your losses short. Now you need to introduce a rule that allows your profits to run. By simply setting these two rules, you can control two important variables – whether or not you make a profit, and how much profit you`re going to make.
Of the two types of exits, hopefully it`s the ones we`re about to discuss now that you`ll get to implement more often, as these are the ones that are implemented once you`re in a profitable situation. Trailing stop losses will allow you to follow a trend as it develops, and exit the position at the point where you can realistically maximize your profits.
A simple example can illustrate the importance of a trailing stop loss. If you received a buy signal and purchased XYZ stock, and set your initial stop loss, you`d be sure to keep your losses small. But, your initial stop does not move. What happens if, after purchasing XYZ, the stock runs up a few hundred percent?
Unless you have a way to lock in the profit, you could keep that position until the stock reverts all the way back down to your stop loss, where you would exit the trade. You would end up losing money even though there`s potential for some fantastic gains.
Obviously, you need to have a way to keep a situation like this from ever happening, and that`s exactly what a trailing stop does. This form of stop is adjusted on a periodic basis according to a mathematical formula that keeps it moving upward as the price moves upward.
After the first day of trading, if the price moves in your favour, or even if the shares volatility shrinks, then the trailing stop is moved in your favor. If the market then moved against you enough for your stop to be triggered, you would still take a loss, but it would not be as large as your initial stop loss.
The key to the trailing stop loss is that you need to continually make adjustments to it to make sure that the stop is moved in your favor. A trailing stop loss is calculated in a way that is very similar to the way we calculated our initial stop loss. The only difference being rather than calculating our trailing stop loss from the entry price, we`re calculating our stop loss from the highest price since entry.
With a trailing stop loss in place, you will be able to let your profits run, and let your trading system deliver the maximum profit.
—————————————————————This article has been extracted from David Jenyns` Trading Secrets Revealed Course. Unfortunately this course is currently sold out. To be notified if and when extra copies are released, please send us an email and we`ll let you know when you can purchase a copy of this highly recommended course. Click Here and send us an email. and be sure to mention you want to be on the `Trading Secrets Revealed Waiting List`.
