By Ulla Decken*
Posted: Jun 19, 2009

Many books and articles have been written on how the right attitude is critical for successful trading and how improving your trading results first requires a shift in awareness. One of the most repeated messages in lectures and seminars on how to change your psychology is to focus on what you want -- because what you focus on is exactly what you will experience more of.

As with almost every trader, I too aspire to consistent profits, so, when I am applying this logic to my trading, it is logical to conclude that I should be focusing far more attention on my exits than I have been.

In his book, Trading in the Zone, Mark Douglas states that one of the foundations of a successful trading mindset is, "I pay myself as the market makes money available to me." Douglas also writes that this can be one of the most challenging aspects of successful trading to master.

If we exit a trade before the move completes, there is a sense of loss regarding the money we left on the table. This commonly occurs with trend-following systems. Most experienced traders will argue that we can never consistently predict how far the market will move in our direction (in other words, picking tops and bottoms), so it's absolutely futile to try.

But, if we cannot aim to pick tops or bottoms, how can we still maximize our potential for profit? The smartest solution I have seen to this dilemma is the staggered exit, variations of which are proposed by Mark Douglas, Walter Bressert, Dave Landry, Chris Capre and others.

This approach requires that, when you place a trade, it must be for a minimum of 2 or more lots, with 3 lots being the most popular number.

With Forex, just use multiples of your broker's minimum trade size. However, some brokers set the minimum at $1, in which case, you would select the minimum that is right for your account size.

Plenty of articles published on the web address position sizing, so I will leave that topic to others. However, I will just add that, whatever the optimal trade size works out to be for your account, you must be able to exit partial amounts of the initial trade.

As with everything else in trading, there are variations on exactly how this staggered exit strategy is employed. Douglas' suggested approach is to trade a minimum of 3 contracts and work out what a high probability target is for each of the 3.

For example, what is the closest support or resistance point to your entry (depending on whether you are long or short)? Then, use higher time frames to work out the next likely support or resistance point for the second, third and any subsequent lots.

Additionally, when taking profit on the second portion of the trade, you'll find that this exit method prescribes that you move the stop loss on the remainder of the open position to the original entry point. All of this is simpler than it sounds, and the following charts show an example of how it works for a short trade.

When you're looking at the first chart, you'll see that the first exit is placed at the immediate level of support shown by the previous lows. Naturally, when working out your take-profit exits, you will have also worked out what the appropriate stop loss would be for your system in relation to the range of the market, but here we're focusing only on profit exits.

Once again, in selecting the second take-profit level in the second chart (shown above), I used previous areas of support but looked to a higher time frame to confirm which support level had been the strongest in previous price action.

This is also the point at which the stop loss on the third portion of the trade was moved up to the original entry point. Mark Douglas explains that arriving at this point basically gets the trader as close to a "risk-free opportunity" as can be achieved while having an open position in the market.

Finally, looking at the last chart (shown below), the daily chart that covers this same time period, we can see that the next support level is some distance away. Remember that, at this point, we only have one portion of our trade left to run.

Using this approach not only gives you small but consistent profits that make your bread and butter but also provides you with the opportunity to capture larger market moves when you pick the right direction at the right time.

Douglas points out that this approach also works on your mindset because it begins to set you on the path of trading from a place of freedom rather than a place of fear. This method engages the mind in constructively planning for profit.

In the previous example, I have used previous highs and lows to select the profit targets, but this is only one of many options. You can calculate your staggered exits with Fibonacci, pivots, round numbers, percentages and so forth, just as you normally do with your entries and exits.

Alternatively, an approach recommended by Dave Landry is a two-position trade where the first profit target should be equal to the amount of risk. For example, if your stop loss is 20 pips, your profit target for your first portion should be 20 pips.

In the event of a successful trade, you take half your profit at this point and then use a trailing stop for the second portion. It is Landry's view that using this method not only locks in profit early but also affords "the chance of all of your trades turning into a home run".

New traders can fall into the trap of thinking they have to choose which exit method they employ, the trailing stop or the profit target. With Forex, some brokers allow very small trade sizes, even as small as $1. This means that, even for people with very small account sizes, they can still split their trade into 2 or 3 exits.

This can then be a combination of a profit target for the first portion and a trailing stop for the second and / or subsequent exits just as David Landry proposes. The staggered exit gives us so many more options for how we exit a trade and when we diversify our exits that the total success or failure of each trade no longer depends on one decision alone.

This actually helps us to be more relaxed about these decisions, and, when we are more relaxed, our decision-making improves. It improves because, the less fear that enters into our decisions, the clearer and more in tune with the market they are.

While it is important to identify high-probability entry points, it is even more important to apply effective risk management and profit-taking strategies. The effect of the staggered exit is that it significantly lowers your risk as soon as possible, and, better still, to quote Chris Capre (a Forex trader who consistently uses this method), it allows you to "reach a point where you are playing with the house's money".

Staggered exits mean that we are drawing out the experience of winning in a trade because, when the market does move in our direction, we have the opportunity to experience making a profit two or three times instead of just once per trade! If we are going to train ourselves to create consistent profits, staggered exits are certainly a popular path to this destination.

*Reprinted (and modified) with permission from Ulla Decken