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Tharp's Thoughts Weekly Newsletter

  • Article: Multiple Exit Rules — Exit Strategy Part 2 by Sam Eder
  • Workshops: Early discount ends TODAY for Forex and Bear Workshops in May
  • Tip: Modern Version of Man vs. Machine — Economist vs. Spreadsheet by D. R. Barton, Jr.
  • Mailbag: The Effect Oneness Workshop had on This Trader

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Feature Article

Florian Grummes Multiple Exit Rules—Exit Strategy

(Part 2)

by Sam Eder

View on-line to resolve formatting problems

Last week we talked about how your exit strategy could be complex in nature so you can trade what is in front of you. The market changes during your trade and managing your position with aplomb requires more than one — or even just two — simple exit rules. This week we continue to delve into the topic reviewing the final six of our nine main types of exits. If you did not read the first part of the article last week click here. In that article, I covered the reasons why complexity in your exit rules can be good and I explained that I am writing from the perspective of a rules based discretionary trader.

Reversal Right After Entry

You have patiently waited for your entry and seemingly timed it to perfection but as soon as you enter the market reverses. There are several chart patterns that indicate that the price has reversed right after entry. These could be:

    • A candlestick or bar formation.
    • A candlestick or bar formation on a different time—frame chart.
    • A close over a key support or resistance level.

You may want to apply some or all of these reversal indications.

If this happens to you, then you are faced with a decision point. Do you now exit the position, lighten the risk amount, or leave it alone and see what happens? There are possible reasons for each path so consult your objectives and know what you will do ahead of time. Also note that reversals right after entries often offer a good entry for a trade in the opposite direction of your original one.

Click Here to View a Larger Image

The Trade Moves Steadily in Your Favor and Then Reverses

Sometimes your trade enters a nice efficient phase where it steadily moves in your direction. Anyone can easily continue to hold a position during this kind of period but what do you do when price then reverses? Do you exit the trade immediately or do you decide to hang on until the trend re-establishes itself? Be sure to consider your objectives for the trade when you make this decision.

Technical indicators such as Bollinger Bands and Moving Averages can serve as trailing stops to help you manage intra-trade drawdowns. As a general rule, the longer the timeframe of the indicators you use to manage intra-trade drawdowns, the larger the drawdowns will be but conversely, you will have greater chance for a larger win in the end.

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Volatile Fast Move in Your Favor

Contrary to some popular beliefs, tightening your stop is good when the market moves quickly in your direction.

Fast moving markets can rapidly reverse and chew though the profits you have made. For this kind of move, it’s best to lock profits in and wait for a re-entry. Sometimes, this means that you may miss out on a move as your position gets stopped out but more often than not it will save your skin.

There are a few techniques you can use to retain your profits in a fast moving market.

    • Tighten your stop to 0.5 — 1.5R
    • Go to a lower time-frame chart to manage the trade
    • Look for a chart pattern reversal

You need to react quickly when you encounter this scenario so be sure to use a rule that is congruent with your trading style and objectives.

Click Here to View a Larger Image

Volatile Fast Move Against Your Position

One of the more uncomfortable scenarios to face is when the market moves suddenly against you.

This can happen when there is either unexpected news, or a global macro-event, or a sudden change in supply and demand.

If this happens, you have a couple of choices depending on your trading style and your view of the strength of the reason for the drop. You could get out immediately or you could wait and hope that the position rebounds in your favor.

This can be a very challenging decision to make but whatever you do, keep risk management at the top of your mind. One compromise for this scenario is to move your stop up tightly below the current price. If price recovers then your position will benefit but any further losses would be strictly limited.

Click Here to View a Larger Image

Price Gets Close to The Profit Target and Starts to Fall Away

An all too common occurrence for newer traders is to have their trade move almost to the profit target, not quite hit it, and then the price falls all the way down to the stop loss.

This can be a classic case of turning a winner into a loser. Not only does this cost the trader profits, but it can be frustrating and psychologically damaging in the long run.

A remedy for this ill is to make sure your reward to risk ratio during a trade is never less than 1:1. Managing your exit point in this way has you effectively tightening your stop once you start getting close to your profit target.

Chart Pattern Reversals

Often the charts act as a window into the soul of a trade. If you see that price is about to reverse, now is the time to act to protect your profits. But some reversals are not as strong as others and you don’t want to be cutting your profits short by exiting on weak signals. You will be tempted to close your trades early if you don’t have this aspect of your exit strategy down pat. If you do see a reversal and you are unsure if you should close your position or not, then you can always scale out or move your stop higher.

Click Here to View a Larger Image

Fundamental or Sentiment Conditions Change

A change in the news cycle from positive to negative can be a good time to exit your position. For example, if the market was ignoring bad news and continuing to push higher, then you would continue with the trade. But if all of a sudden, the market starts selling off in reaction to new bad news, then you know that something has changed either fundamentally or sentimentally and it’s time to sell.

Similarly, there could be a macro event or other news that could drive a sudden change in the price movement. If your assessment is that this event is likely to continue influencing the market or your position, then you should also close the trade.

Note — if you get good at executing condition change exits, they can be quite powerful - enough so that you should prioritize them over more simplistic technical exit rules.

Making it Possible to Trade in The Moment with the Market

By implementing a complex exit strategy with many reasons and rules for exiting a position, you will have the tools you need to trade what is in-front of you. As Michael Carr, a Market Wizard stated:

“Don’t worry about what the markets are going to do, worry about what you are going to do in response to the market.”

As you plan your exit rules, make sure they align with the objectives of your trading system and that you have them written down. Their individual use should be preplanned based on the careful identification of decision points and not merely applied on a whim.

Adding a series of well thought out exits that cater to different conditions is one of the best ways to improve your trading strategy and portfolio performance.

How can you add new exit rules to your trading plan so that you can trade more profitably?
About the Author: Based in New Zealand, Sam Eder trades currencies using rule-based discretionary systems. He has studied Van Tharp’s trading principles extensively over the last 10 years and incorporates many of those when writing his daily blog posts on his Forex signals service FX Renew.



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Trading Tip

Van Tharp

Modern Version of Man vs. Machine —
Economist vs. Spreadsheet

by D. R. Barton, Jr.

View on-line to resolve formatting problems

I remember the “man vs. machine” stories that I heard in my youth — mythical Paul Bunyan vs. the chainsaw and the legendary John Henry (the steel drivin’ man not the current Red Sox owner/commodities trader) vs. the steam drill. These were larger than life characters who were the best in the world at what they did and met their match at the hand of machines.

Today’s version of the story pits all those highly paid Wall Street economists against computer models. Actually, in the case of GDP forecasting, the economists may have met their match in a spreadsheet.

And just like in the stories of Paul Bunyan and John Henry, the machine is winning.

The GDPNow Model — So Far, So Good (in fact. . . very good)

On July 10, 2014, the Federal Reserve bank announced a new forecasting model it called GDPNow. You can read Atlanta Fed Sr. Economist Pat Higgins’ blog post on the subject.

Since you’ll want to follow this forecasting model, you should read that post from the research department. It gives a simple-language explanation about the model and does a good job delineating its strengths and weaknesses and links to the working paper that gives the model’s technical documentation.

In short, here’s what the forecasting model does: it uses real-time inputs from the 13 different subcomponents used to calculate GDP and updates those as they are available throughout the quarter. To illustrate this visually, here’s the graph from the Atlanta Fed’s website for the current quarter’s numbers:

This morning’s GDP growth figure for the first quarter was a lowly 0.2% which sent the US dollar scurrying down in morning trading. How did the economists do vs the GDPNow? As you can see from the chart below, GDPNow forecast 0.1% while the consensus among Wall Street economist was 1.4%.

So how has the model done in other quarters? Actually, it has performed really well overall. The model has been tracking GDP since 2011 and has had an average difference of 0.68 percentage points from the actual results. In low-growth quarters (those with forecasts below 1%), however, the GDPNow model has done much better — within 0.3% per quarter. That last figure did not include today’s first quarter forecast so the revised figure will be much lower.

If you are interested in seeing up-to-date information, you can find the model’s forecast at Atlanta Fed’s website.

This page alone is quite rich in detail. Be sure to check out the tabs below the chart for a good FAQ section and lots of other useful material.

I would welcome your thoughts and comments — please send them to drbarton “at” It’s always a joy hearing from you!

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured analyst on Fox Business’ Varney & Co. TV show (catch him most Thursdays between 12:30 and 12:45), on Bloomberg Radio Taking Stock and MarketWatch’s Money Life Show. He is also a frequent guest analyst on CNBC’s Closing Bell, WTOP News Radio in Washington, D.C., and has been a guest on China Central Television — America and Canada’s Business News Network. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".


The Effect Oneness Workshop Had on This Trader

About a month after this trader attended his first Oneness Awakening workshop he wrote this:

Hi Van,

I wanted to thank you for the workshop. It was a real gift; the transformation has been amazing. At the beginning I was very confused about what I should be feeling or practicing to continue experiencing what I was experiencing. After a couple of weeks the intensity of the feelings slowed down, but the clarity and awareness continued. I joined a Kundalini Yoga practice and some South Florida phone meetings, and I am currently investigating modifying my diet towards a less red meat option.

On the trading front it has been incredible; the profit/loss has stabilized; but what blew my mind was the disappearance of doubt and fear when turning on CNBC; I feel that if I turn it back on, they will steal my mind again. Most of the time I just know what the market is doing, and if I am wrong I just exit. No hoping!!

I currently don't have a day trading system to follow; but turned a couple of stopped out trades, which would have been average losses on my system, into small profits; I expect that new improvements will improve my R multiple at the end of the month and my 4.5 SQN system might get even better (although the score might go down a bit because of the change of variability between the winnings and losses).

This really changed my life and my family for the better. If I weren't experiencing it first—hand I would have never believed it so deeply. It opened my curiosity. I can't stop investigating and trying new things.

The weirdest thing happened, now when I get that rush in my head, instead of laughter, tears start coming out with no apparent reason and my sense of smell is amazing; I can pickup even the slightest smell in much detail. Weird! But the feeling is incredible.

Juan Carlos A.

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April 29, 2015 #731


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