There are two sides to every trade: the entrance and the exit.
Most of us at least start out focusing almost exclusively on the entry. How much do we want to pay? How much do we have to pay? What entry will produce the highest percentage of winners in our trading account?
I get it. It makes sense.
And it’s exactly what I did when I was starting out myself.
Novice traders view the markets differently than professional traders do, and it all comes down to the illusion of control. We all want to feel like we’re in control of what’s happening around us. For traders, that means believing that, with the right entry, we will gain some control over the outcome of their actions.
Once we’re in the trade, we lose all control over the position and it is at the mercy of the market to do what the market is going to do.
All of this sounds pretty dark and gloomy, right?
But there’s a bright side. All it takes is a new way to look at your trading.
The Positive Mindset
Most traders don’t spend nearly as much time thinking about their profit target compared to their entry strategy, but your profit target is responsible for how much money you make.
It’s the same with stop losses. Your stops can be directly responsible for your risk and your loss amount, but most traders don’t spend much time, if any, really thinking about what works best and if they’re optimizing their trades.
One way to flip the script if through something I call “positive expectancy,” which is the practice of minimizing your losses and maximizing your winners. And guess what? Both of these elements have to do with your exit strategy instead of your entry strategy.
You minimize your losses by placing stop losses that are effective without stopping you out prematurely, and you maximize your winners by implementing a profit target or a trailing exit strategy that allows the market to maximize its momentum without exiting prematurely and missing out on a strong and powerful move in your direction after your position has been liquidated.
You let your winners run and your losers die out quickly.
Sounds great, Rob. But how exactly do you do that?
It’s time to familiarize yourself with the ATR indicator, which measures the daily or intraday trading range of an asset based on its actual volatility. It’s a metric that, even though it was created more than 40 years ago, remains one of the best indicators for measuring the current volatility.
What I like the most about the ATR indicator is how it adjusts dynamically as volatility changes bar by bar or day to day, depending on your time frame.
The result? The market tells us where to place our stop losses and profit targets based on what’s happening at that moment.
Trading is not a one size fit all thing and different markets produce different levels of volatility at different times. By using actual market volatility to measure our stop loss levels and profit targets we give our positions the breathing room they need and at the same time the protection level necessary to achieve the best risk to reward ratio.
Finding breakout stocks is both an art and a science. Traders rely on visual analysis as well as technical indicators to help them find high probability setups that produce less false breakout signals. But there are a few patterns that happen over and over again in today’s market and are are powerful way for traders to spot the next big move upward. Here’s what they look like…