Various approaches have been offered that usually requires a bit of sacrifice on the part of your profits. For example, there is the approach of moving one’s stop-loss under every dip in equity once the retracement against your position appears to have ended and your equity is once again growing. The shortcoming to this approach is that you will always leave on the table the difference between the final top and just below the dip you had placed your final stop-loss order. Many times this can be a sizable amount of unrealized gains.

Other approaches may use some kind of standard indicator, such as a moving average indicator. The idea here is to place your stop-loss just beyond the moving average indicator as it continues to follow the ebb and flow of the market. At any point the market dips below this moving average, you will be stopped out. Of course, there will be many times the market will dip below the moving average line long before the move has actually exhausted, again denying you the opportunity to capture the bulk of the move. To avoid this, some may relax the moving average by using a larger sample value. However, this then forces you to have your stop-loss much further away from actual price action which upon conclusion of the trade will likely have you in the trade longer, but not with any more (and many times less) profit.

One of my favorite stop-loss approaches I call the S.T.O.P technique. This is an approach similar to using trend lines to stay in a trade while momentum stays fairly constant or increases. The concept here is that when momentum starts to wan, the market will usually be topping and will drop, or it will start to consolidate before starting up again. If it drops, we are stopped out. If it consolidates, the trade continues.

The commonality of all these techniques is that we let the market decide when we should exit, and it usually will do this below the top by some margin. The best situation for any trader is to get as close to that top as possible before exiting. Profit is profit, so any trader should be happy if gains are more than two times risk. However, if you can improve your exit strategy so as to improve your profit-to-risk ratio, would you do it? If so, read on.

W.D. Gann once wrote, “After you start actual trading, when you make a trade, don’t close it or take profits until you have a definite indication according to the rules that it is time to sell out or buy in or to move up the stop loss order and wait until it is caught. The way to make a success is to follow the trend always and not get out or close a trade until the trend changes.”

There are several points made in his comment. One is that you should not exit a trade ‘until you have definite indication…to not close out until the trend changes.’

Your rules and W.D. Gann’s is most likely different. His was one based on TIME and PRICE, as is mine. If it is not TIME yet for a top, why let your trade get stopped out too early?

Timing is part art as it is science. Some use canned indicators to time the markets, while others determine the market’s cycle pattern. Whatever you use, are you also using it to decide when to move your stop loss up? Or are you simply using one of the previously mentioned approaches that have nothing to do with the trend?

The advantages of learning a good timing model is that, once you’ve determined the accuracy of the model, you can rely on it to tell you when to start preparing to exit. Using the timing model should be effective enough to warn you that a trend change is near. Obviously, if the trend is going to change shortly you should be moving your stop loss up tighter than just behind a previous dip or moving average line. The time is close for that price area to be exceeded when price decides to change trend. It may be a good idea to start planning on moving your stop under the bottom of the last two days or something of that nature, if it is higher than the last dip or moving average value. Start edging yourself out of the trade by locking in a bit more of the profits before you are stopped out.

For this to be effective, of course, your timing model must be pretty accurate. Basic trading systems do not normally offer such accuracy. With the goal of most systems to win around 35% of the trades taken, they obviously rely on other variables to be profitable in the long run, while drawdowns can be quite large in-between.

W.D. Gann used various techniques to time his trades. He talks about cycles of various fixed lengths as well as certain day counts. He also addresses using ratios of previous moves to anticipate future moves. When a cycle is due to top, or a large anniversary date is due, many times the trend will change. If you calculate this properly, it can be the signal you need to move your stop loss out from the simple dip-to-dip or moving average mode and closer to the top by whatever percentage you feel appropriate.

So what does this all mean? If you really want to take advantage of most of a good trade, consider learning about cycles. Don’t be satisfied with ‘what the market will give you’. The market will give you nothing unless you act and just take it. Don’t ever think the market is some entity that sits back and divvies out each one his portion as it sees fit. Each trader must sharpen his own tools and ‘take’ a cut out of the market in proportion to his experience and abilities. Expand your abilities and look to learn as much as you can. When a trader asks me my recommendation for a line of study, I always point towards dynamic cycles. It may not be an easy thing to learn, and you’ll have to ignore the critics who think they are trying to save your trading life (but really are wasting your time) and take a look at concepts never considered before. Whatever you decide to do, keep this in mind. The best time to exit a trade is when the trend is ending. If you can increase your ability to determine what a trend is and when it is ending, you will likely increase your share of what you used to think ‘the market is giving you.’

Note: About the Author
Rick J. Ratchford is President of ProfitMax Trading Inc. He is a full-time commodity trader for his own account as well as assisting other traders. He has been a computer programmer for more than 20 years and a trader since 1990.