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Karen Gibbs (K): Is it different for investors versus traders?
Jackie Ann Patterson (J): Yes, I really think it is. I think that the time frame, the mindset that you start out with has a big effect on the type of exit strategy that you’d like to use. Certainly if you’re entering the market with an idea of holding a position for over a year, getting favorable long-term tax treatment, you’re going to want to do something different than a swing trader. If you’re a swing trader entering the market, and you want to get gains not after a year, but after one day, or four days, that’s going to prompt you to think about exits a little bit differently.
K: What are the key elements of a trading strategy?
J: Well, I think there’s two really big key pieces to a trading strategy or to an exit strategy, in particular, and one is how do you handle losses?? When do you cut losses short? What sort of method will you use to limit your loss and be able to preserve your capital and your peace of mind in order to be able to trade again? So that’s one side.
The second side, I think, is how to capture gains, when to take profits. It’s important to think about that also as part of the exit strategy.
K: How do you suggest limiting the losses?
J: Well, I think there’s a couple different ways to limit the losses. As far as exit strategies go, looking at a particular point, a particular price, whether you set that in the market as a stop loss or keep that in mind, that’s one way to do it.
The other way is to have a particular signal if the conditions change. That could be another way to limit losses if somebody has, for example, gotten in when price has been going up, has been passing moving averages, if price starts going down, passing those same moving averages, that might be a signal to get out, even if the position has not yet become profitable.
K: And ringing the cash register, taking those gains.
J: Yes, yes. I think that’s the happy part of trading, and it’s also a part that may not get as much attention as it fully deserves, to think through what sort of situations will be the time to ring the cash register, to get a paycheck. Does a person want to set a target and exit when the price reaches a certain point, whether that point is a dollar amount or whether that’s a certain configuration of indicators, or is a person more inclined to let winners run and do something? Say, for example, trailing a stop along with the price as the price goes up, to match that with a trailing stop price, and in that way protect profits using a stop, as well as limiting losses.
K: So you have to kind of match it to your personality or style?
J: Yes. I think that’s really a key thing, is to match the exit strategy to your trading style and to your personality and to your temperament and that will give you a boundary of the different sorts of exits you might consider.
For example, the long-term trader might be more interested in strategies that let the winners run and go on longer versus a short-term trader might be more interested in setting some very near-term targets than taking profits, but within that context, I think it’s also important to understand the trading strategy and understand the potential performance of the trading strategy, and use that hard data to make decisions about which strategy might work out best for you.
K: Jackie, thanks for your insight.
J: Okay. Thank you.
K: My guest has been Jackie Ann Patterson. You’re watching TheMoneyShow.com Video Network.