This post addresses the issue of exiting trades too early, which is a common struggle among many traders. For me, it was one of the most challenging trading mistakes to overcome. Have you ever manually exited a trade for a small win or loss, only to regret it the next day? I bet it has happened to you more than once.
If you have difficulty holding onto trades and tend to exit winning trades too soon or close losses before they hit your stop loss, this postis for you. There are usually various contributing factors that cause traders to exit trades too early, such as their trading process, trading psychology, personal belief systems, recency bias, or a combination of these factors.
The following are the most common types of premature trade exits that lead to regret:
- Exiting a trade at break-even frequently due to fear of loss, only to see a large portion of these trades become winners (note that break-even is actually a loss due to the spread or commission paid to the broker!)
- Exiting a trade for a small profit well before your planned profit target because you fear the market will reverse, only to see the trade hit your initial target and more.
- Exiting a standard trade at a partial loss for various reasons, well before the stop loss is reached, only to see the trade become a winner.
- Inability to pyramid into positions (add to winning positions) and constantly exiting these larger positions due to fear that the market will reverse.
The Four Major Factors Contributing to Early Trade Exits
1. Inadequate Trading Process and Lack of Market Understanding
Traders often exit trades too early because they lack a clear understanding of their overall trading approach and how to properly operate in the market when it comes to entries, exits, and trade management. Many traders start trading with real money before developing a sound trading concept, which can lead to premature trade exits.
If you spend too much time monitoring your trades, you are likely to make mistakes in your exits. Traders who have not yet learned to set and forget their trades after entering them tend to exit trades too early. It’s crucial to understand the importance of letting the market take you out of your trades and how to do it correctly. By doing so, you will be trading in line with the market and not trying to control it or fight against it. This approach positions you to take advantage of big moves in the market when they occur, which is how fortunes are made, instead of settling for small, emotionally-driven wins.
It’s important to remember that trades can continue to move in your favor beyond your expectations. While amateurs and losers attempt to predict trend changes, professional traders are happy to take profits as the market consistently trends up or down.
Risking too much money per trade is one of the biggest culprits of early trade exits. Over-leveraging can make you nervous and sensitive to every market move for or against your position, causing you to exit too early. It’s essential to reduce your dollar risk per trade until your emotions are under control and you can sleep soundly without worrying about your trades.
2. Trading Mindset (Psychology)
Exiting trades too early can be attributed to a lack of understanding of market movements and having an incorrect trading mindset. Many new traders believe they can make a quick profit and quit their jobs before they have any experience trading. However, only 10% of traders survive long-term, and to be part of that 10%, you need to act differently from the other 90%. This requires having and maintaining the proper trading mindset, which influences your habits and ultimately determines your success in the market.
It’s important to accept that slow and steady wins the race, and that a low frequency trading approach can lead to faster gains. The more you try to make money quickly, the more likely you are to lose. Successful trading is the result of focusing on trading performance, being consistent, and doing all the little things right day in and day out, so that there are no major fluctuations in your equity curve. Once you embrace these concepts, your mindset will be better aligned with the requirements of becoming a profitable trader.
3. Recency Bias
Recency bias is a psychological phenomenon that suggests our recent experiences have a greater impact on our behavior than older experiences. For more information, you can refer to my article on recency bias in trading.
Here, we are concerned with how recent losses in trading or other negative experiences can reinforce overly cautious or defensive attitudes towards the market, leading to fear. Traders are often overly influenced by their recent trades, becoming fearful if they experience a few consecutive losses, and start to view the market as more dangerous than it may actually be, ultimately losing confidence in their trading edge (a dangerous habit). It’s important to remember that your trading edge is only apparent over a large sample size of trades and you can never know for certain which trades will be winners or losers. Therefore, allowing your past trades to influence your feelings and behaviors for future trades is not productive or logical.
4. Life Experiences and Belief Systems
Many traders enter the market with a negative mindset, already anticipating failure. After experiencing a few losses, they may think thoughts like “I’ve always been poor, so I’ll probably stay that way.” However, allowing these negative thoughts to take hold will only lead to negative emotions and bad trading habits, resulting in even more losses.
Your beliefs and attitudes about money, trading, and wealth can have a significant impact on your mindset and trading decisions. Even subconscious negative or skeptical thoughts can affect your ability to let trades run into big winners.
To become a successful trader, it is important to not only learn about the markets, but to also examine yourself and master both. If you fail to address your own faulty thinking and logic, even the best trading strategy will not lead to profits. Additionally, if you do not understand and become attuned to the markets you trade, you will not make money trading.
To approach trading with the right mindset, it’s important to be open-minded and approach it as an “empty slate.” Don’t be skeptical of those who are teaching you or seem to know more than you. While not all traders make a lot of money from speculation, some do, and it’s possible for you to be one of them as well, as long as you leave behind any preconceived notions about trading and approach it with an open mind.
How do I prevent exiting a trade early?
Correcting the mistake of exiting trades too early is not a complex task, it simply requires some education and self-discipline. While I can provide guidance on the former, the latter ultimately rests in your hands as I cannot force you to be disciplined.
To prevent premature trade exits, it is crucial to create a well-defined trading plan that outlines your exit strategy and adhering to it unwaveringly, regardless of external influences. Understanding the power of set-and-forget trading and stepping away from the market while your trades are live is essential. It’s important to find a hobby or a distraction to avoid obsessing over the live trades, as watching the screens excessively is the cardinal sin of trading.
Other helpful practices include maintaining a trading journal to track your trades and their outcomes, which serves as an accountability measure. Incorporating regular affirmations into your trading routine to reinforce fundamental principles and instill proper trading psychology and procedures will also aid in training your brain.
How to avoid early exit trade scenarios
To be more specific, let’s discuss a common problem that traders encounter when exiting trades too soon, and provide some helpful insights based on our 5 years of experience in the markets.
Exiting trades at break-even constantly due to fear of loss.
Losses are inevitable in trading, and it’s important to be prepared for them and learn to lose properly. Fear can be a hindrance to trading success, so it’s essential to overcome it to exit trades properly.
First, it’s important to accept that you will lose on some trades, and it’s part of the game. Determine your 1R risk (the amount you are comfortable losing on any given trade) and use a wide stop loss if necessary to give the trade room to breathe. Once you have placed your stop loss properly and adjusted your position size to maintain your 1R risk, you should let the trade run and trust that you have managed the risk properly. If you exit trades at break-even due to fear of loss, you are potentially avoiding a win, so you need to give every trade a chance to work in your favor.
It’s crucial to manage the risk properly and not be afraid of it. You can use a trading journal to keep yourself accountable and review your trades to identify areas of improvement. Additionally, trading affirmations can help train your brain in proper trading psychology and procedures. Remember that losing trades are a part of the game, but managing the risk properly and giving every trade a chance to work in your favor can lead to long-term success in trading.
Closing a trade with a modest profit, but well before the intended profit target.
It’s understandable to feel the urge to take profits when you’ve earned a decent amount of money in a trade. However, in the long run, relying solely on small profits or even 1R profits won’t sustain your trading success. To achieve success, you need to aim for larger profits, such as 2R or 3R profits, and occasionally hit a “home run.”
It’s crucial to resist the temptation of exiting a trade prematurely just because of a 1-hour pin bar against your position. Remember the time frame on which you entered the trade, stick to your plan, and avoid panicking or settling for small profits frequently. Small profits can easily be wiped out by a typical 1R losing trade. Patience is essential if you want to achieve significant profits, and you must give each trade enough room and time to grow.
However, it’s not to say that a 1R profit is always unacceptable, as there may be times when it’s appropriate. But relying on small profits chronically will lead to slow, painful defeat in the long run.
Closing a trade at a partial loss for any reason.
Have you ever heard the saying “death by a thousand cuts”? This is precisely how many traders deplete their trading accounts by taking numerous small losses. Although closing a trade for a small loss feels better than taking a regular or larger 1R loss, you are effectively relinquishing the chance the original trade concept presented by closing out the trade before it reaches your stop loss. The market will reveal if you were correct or incorrect given enough time, and it’s critical to allow it to do so. Once your trade is live, you have no idea where the market will go; all you have is a trade concept that represents your edge. Your stop loss is positioned on the chart to negate your trade concept if the price reaches it. Don’t be swayed by intraday price movements and resist the urge to close the trade early because your emotions are getting the best of you. Stick to your plan.
Fear of the market reversing prevents adding to winning positions through pyramiding.
How do you create significant wealth through trading? By capitalizing on those rare instances when one of your preferred markets is genuinely and persistently trending in one direction. These trends seem almost too good to be true and can be challenging to manage for many traders. However, you must take advantage of these opportunities to develop your account and succeed.
Read our post on how to pyramid into trades if you have not done so already to learn more about this technique. There is a strategy to it, but essentially, you are adding to winning positions at strategic moments to leverage your initial 1R risk into a significantly larger reward. A single successful trade like this can make the difference between a losing year and a highly profitable year for many traders.
Do not allow fear to hold you back from potentially lucrative trading opportunities. To identify when a market is genuinely and powerfully trending and may be ripe for pyramiding, it is helpful to comprehend how to read the price action and money footprint on the charts.
We’ve made all the mistakes mentioned above and experienced them firsthand. It became evident that while having a good trading strategy was crucial, having the right trading process (i.e., how to behave, exit, and manage trades), mindset, and belief systems were equally important. Our trading style is based on the principle that entering a high-probability trade is 90% of the work done, and the fate of that and every trade must be left to the universe, rather than overthinking, over-analyzing, and letting my ego take over.
We all understand that we cannot control the market, yet we often try to do so, even unconsciously. To succeed, we must let go as much as possible, remove ourselves from the situation, and allow our trading edge to play out uninterrupted. By employing the set-and-forget trading style discussed in today’s lesson and expanded upon in our professional forex trading course, we trade in harmony with the market, rather than trying to impose our will on it. This is the foundation for real and long-lasting trading success.