This article was written by Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).
Traders often obsess over an entry point and timing, but it’s the closing of a position that determines whether a trade has been profitable or not.
This is often the most difficult task for the unseasoned trader. It doesn’t matter whether a trade is a winner or a loser; the decision to crystallise brings along a series of uncertainties and can undermine trader discipline. A winning position could win more, while a losing position could reverse its course, if not halted. How to determine the best timing to close a spread bet trade?
The answer is simple.
Have a detailed trading plan and stick to it.
Determining certain aspects such as where you plan to exit, whether it is at a loss or at a profit, prior to entering a position, can remove some of the uncertainty and help prevent any costly errors or emotion-based decisions in the long run.
Traders should have a target in mind and should determine the risk he or she is prepared to take in order to reach this target. Think of a stop loss as the amount of money you are willing to bet that the trade will go in your chosen direction.
Generally speaking, there is no such thing as “the best timing”. The ideal would be to ‘buy the dip and sell the top’, but let’s be honest with ourselves: this is not the most frequent scenario. In the majority of cases, the market will continue going in the direction of a trade that has just been closed. In other situations, the trend reversal will happen right after the loss is taken. The key of a successful trading book is good discipline and to remember that another trade opportunity is just around the corner.
LCG’s trading platform offers the possibility of setting various order types, with the ability to utilise advanced trade protection such as a Stop Loss, Take Profit or Guaranteed Stops. A successful trader sees a position as an entire package that includes an entry level, a take profit and a stop loss. It is important to be mechanical, unemotional and aware that losses are in fact a significant part in trading.
While it is acceptable and a commonplace to manage an open position by adjusting the profit target and perhaps setting a trailing stop to lock in gains, it generally happens to be a bad idea to be similarly flexible on the stop loss level. Respect the stop loss initially as this is the risk that has been seen appropriate while opening a position.