Most traders are very preoccupied with making their entry points as ideal as possible, using elaborate screening mechanisms (including all kinds of fanciful indicators) to help them develop supposedly superior entry techniques. However, it is worth noting that despite more elaborate and sophisticated entry techniques being developed over the years, the overall success rates among traders have remained largely unchanged.
One main reason for this phenomenon is that people usually do not have any idea when they are going to get out of a position they have entered into. In fact, a trading system is hardly a complete one if a well-defined exit plan is not available. A systematic exit plan is needed to ensure you know how to take profits and cut losses. Quite simply, the cardinal principle in trading, i.e. to cut losses short and let profits run, is all about having a good exit plan.
Most people ignore or underestimate the importance of exit strategies. It is no wonder traders continue to struggle to make money despite being so knowledgeable about all kinds of indicators and entry techniques.So, why do people underestimate the importance of exit strategies? I suggest that selecting entry points gives us a sense of being in control, which is largely an illusion. In contrast, exit strategies involve trading actions (i.e. getting out of trade positions) which are not immediately executed when a trading opportunity is first identified. The excitement is the strongest at the point of entry, whereas exits involve actions which can be delayed indefinitely. As such, there is naturally less interest in exit techniques.If you think carefully about what trading really is, you will realize that the outcome of every trade taken is the result of price movements which occur between your entry and exit points. Traders doing the same trade by using the same entry setup (leading to the same entry level) can produce vastly different outcomes due to different exit levels. Many traders allow their emotions to dictate their exits, leading to bad trading performance regardless of the elaborate and sophisticated entry techniques they use.Statistical research shows that exit strategies account for a greater part of overall returns than entry techniques. So, it is certainly in your interests to pay attention to how you take profits and cut losses.
