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Testing Your Exit Strategy

Anyone who has been trading for a while will tell you that stop loss orders are imperative to prevent disasters that lead to major losses or total blow out. 90% of traders fail because the have catastrophic losses that lead to total failure. It is essential to have stop loss protection.

No one enjoys being stopped out during a potential successful trade, but consider it as traderís insurance. You would not consider purchasing a home without insurance. Nor would you consider it a waste of money if the house never burnt down and you did not collect on the premium. However, if a problem occurs, you are glad to have the policy. Stop losses are our equivalent of an insurance premium and must be considered as the cost of doing business.

How good is your exit strategy? It must be tested. Test the exit strategy by using a series of random stocks, arbitrarily picking entry prices and direction of the trade. Place your exit stops and begin your exit trading strategy. After trying 30 to 50 hypothetical stock trades, check the results of the profits. If the results are at least break even, your exit strategy is good. If you have a net loss, then the exit strategy must be overhauled.

 

 

 

 

 

 

 

 

 

 

 

 

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