Day Trader’s Guide to Mastering Trade Exits for Profit Targets

Day Trader’s Guide to Mastering Trade Exits


One of the many joys of successful day-trading is counting the number of profitable trades and watching your equity curve inch higher. Of course, the opposite can be said of negative trades that decrease your equity.  In the end, it is a combination of experience, temperament, market volatility and your application of risk management (Trade Exits) that will determine the outcome of your trading account and long term equity curve.

But while day-trading can be potentially rewarding, there are certain nuances that set it apart from swing trading with higher time frames, and one of the most obvious is the need for quick thinking and decision making. As we will see, deciding when to exit the market is often an area many new traders struggle the most when day trading. In this article, we attempt to lay out general guideline for day traders to setting specific profit targets – and timing market exits in general.

Trade Exits – The Psychological Element in Trading

The decision to exit the market is usually very susceptible to emotional considerations, especially for newer traders.

Perhaps you are just about to square out on the fourth consecutive profitable trade – or maybe the third straight consecutive loss. All the anxiety surrounding the fact that you are about to seal your fate and the uneasy feeling right after if the market ticks more in your favor – or turns around just at that precise moment leaving you in delight. Combine that with the need to make a quick decision on a lower time frame, and you have a complete package of why addressing the need for timely exits can be so crucial for day traders.

While the higher time frames can allow traders more time to think – and re-think – a decision as important as the final exit, for day traders the skill needs to be ingrained in their instinct as a delayed action can quickly become costly.

An intuitive way to address the problem would likely be to shoot for a rigid exit strategy that eliminates all guesswork and perhaps even allow you to automate your strategy (as a lot of day traders with higher frequency trading strategies often aspire to do). But this can be a grave mistake to make.

Why a Rigid Exit Plan is not the Answer

Absolute Rigidity in trading can hardly ever be rewarding over the long term. With the subjective and fickle nature of markets, it is near impossible for traders to account for all contingencies, let alone find a ‘one-size-fits-all’ exit plan for every trade.

Bear in mind that we are trying to shun the approach of having a pre-defined profit taking strategy for all trades, as traders aim to eliminate the need for thinking as a measure to adjust to the high-speed nature of a lower time frame trading. It would, of course, make a lot more sense for traders to sometimes have a pre-defined profit target for a trade based on market dynamics and circumstances for that particular instance.

Let’s consider an example (and for simplicity) I assume a trading strategy involving candlestick patterns.

Exits strategy candlestick

If a trader was to short this bearish pin bar on the 15-minute time frame, it wouldn’t be unacceptable to think of the pink marked support and resistance zone as a rigid profit target, so as to acknowledge and respect its strength. (Past performance is not indicative of future results)

But as you begin taking more and more trades, you may quickly realize that not every trade will supply you with the luxury to have obvious market-forced driven profit target to aim for.

The above chart illustrates the difficulty of potentially having to choose a rigid pre-determined profit target for every trade.

Trade Exits Profit Target

In this example, we have a bullish engulfing pattern that has a short distance to run to a first potential trouble area for the price that could have potentially served as a rigid take profit target for a very short trade.

As you can see, the move was actually worth a lot more ticks than a hard take profit level (at profit target 1 or at profit target 2) would have yielded.

A better approach could perhaps have involved a flexible exit strategy that could have prompted you to take some profit at profit target 1 and let the trade run to profit target 2 to take the rest of the profit there. Alternatively, you could have waited to follow price action at these levels to make up your mind about exiting ad hoc.

A more flexible approach to trading, especially on lower time frames, can understandably be more difficult than having a rigid take profit level that involves no thinking, but true trading success relies heavily on sound impromptu and instinctive trading skills that allow you to adapt to market conditions and manage your trades more by market dynamics, than what a paper reads.

We neither recommend a rigid hard take profit level for every trade nor a flexible one. One of the best ways to nail down the anxiety associated with trading and exiting trades in a high-frequency environment is to use each approach to its given merit rather than a hard and fast rule.

Eventually, that means that you will be facing situations where you do have to make decisions to exit trades ad hoc and quickly too. And that brings us down to the next point.

Learn to Read the Markets Better

A skill to learn and eventually master is the ability to read price action off your chart and follow the addition to the story that each newly printed candlestick makes. Quite often, even traders who follow price action based strategies (such as candlestick or chart patterns) will limit their analysis and interest to spots and times where they know they can potentially enter a trade.

It really helps to be able to simply follow the market rhythm at all times. The lower time frames allow this opportunity a lot. If you are a frequent trader, you are likely focused on a single or perhaps only a few trading instruments possibly allowing you to eyeball the price action through the entire trading session.

Being able to know what price is doing and why it is doing it can be critical not only in landing potentially high probability trades but also in trade management because more market knowledge and logic-backed decisions can do wonders in lowering your anxiety levels, especially when making the all-important exit.

Whether you are considering a horizontal support and resistance level or a trend line, sometimes the best approach to managing a trade as it approaches this key area is to simply watch what it does as it hits it. We already addressed how a flexible approach can often allow you to time your exits better. Knowing your market like the back of your hand goes even further in helping you exit trades logically.

Relying on price action for the exit call could likely involve waiting for specific candlestick patterns to indicate market direction or perhaps even as simple as the strength of the candlestick close.

We’ll consider the example above to better illustrate this point:

Trade Exits Bullish

For an informed trader who understands price action, waiting for something as logical as a strong bearish close under the marked levels to exit the trade would have allowed for the trade to potentially run.

At the first hurdle we see price closing above sharply (a good indicator for bullish strength), then pulls back to the level to print a bearish candle with a very weak close still within the Support/Resistance zone’s territory. At the second resistance level, we see price just pushing through with no stops at all.

Stoploss Disclaimer: The placement of contingent orders such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders

Simply waiting to see how aggressive bearish candlesticks were to close at these levels could have allowed for a logical reason for a trader to potentially stay in this trade.

Understanding price action and the role of candlestick formations and chart patterns may potentially lend you a major edge in trade management. It is not a perfect solution as the market will always pack the potential to surprise you, especially on the more fickle-natured lower time frames. but for the vast majority of cases of trade management, the knowledge should help you back your exit decisions by sound logic.

When an exit is reasonable and contested with logic, it is surprising how the aftermath can be less concerning. After all, you did your best to read the market. However, the most standout advantage of having a better grip on price action when it comes to executing your exit is its ability to be ingrained into your instinct with time.

Since most of the higher-frequency trading has to rely on instinctive decision making, understanding price action allows the trader to find the perfect balance between relying on that intuition and also adding an objective element for the trader to be confident about the decision itself.

Final Words on Trade Exit Implementation

It can’t be emphasized enough how much mastering the skill of short-term trading has to do with the real-time application of risk management.

We talked about certain approaches to profit targets that need to be ingrained into your instinct so as to allow you to make quick decisions as a day trader. Unfortunately, there is no alternative to real-time experience and applying what you know while the market is active.

Traders often commit the mistake of spending too much time ‘practicing’ on demo or on small accounts. While these environments help in refining your trading strategy – including determining exit rules – they cannot replicate the real environment you will be making your trading decisions in on your fully capitalized account. When tackling trading aspects like exits that constitute major involvement of human emotions, it is best advised to be practicing in a realistic setting –  On your actual trading account.

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