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  • Writer's pictureMatt DeLong

What is a right time to close a trade?

There are 2 scenarios that come to mind: 1) Know when to hold 2) Know when to fold.

Take a Loss

Before you enter a trade, you need to know when to “bail” on a trade. Assume 50/50 odds that the trade *may* move against you — when will you exit and close the position for a loss? We typically refer to it as a “STOP”. Before I enter a trade, I know my entry, stop & position size (calculated by my risk management strategy of “Trading an R” — link here). So, before I jump into a position, I know where I will pull my emergency brakes and deploy my parachute so I can trade another day and preserve my capital. Most novices will add to a losing trade and double their position to “dollar cost average”, which now doubles your losses and each tick against your position now moves twice as fast. DON’T BE “THAT GUY”.

Lock in Gains

So you have a nice gain and wondering when to lock it in — this is actually harder to determine. Some traders use a “price target”, which is challenging because the market doesn’t care about what you want — it will do what it does. If I’m up “1R” on a trade (link here), I move my pre-determined STOP to b/e (breakeven) so my winner cannot turn into a loser. As I hit 2R & 3R and more in profits, I move the STOP up each time to the previous R level essentially risking 1R of my profits for an additional move. This essentially becomes a “trailing STOP” as it moves in my favor, I move the price where I close the position up as well to protect my profits.

The exact entry price and STOP comes naturally after years of experience and making mistakes and studying for thousands of hours.

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