We can make money in trading at the exit, not the entry. The art of exiting a trade is critical to a trader’s success in the markets. Profits can vanish if they are not taken at the right time, and small losses can balloon into large losses if they are not cut short. Small profits can quickly grow into large profits if you allow them to run until they truly stop moving in your favor. Keeping capital locked up in a dormant trade can cause you to miss out on other excellent opportunities. Here are the best ways to exit a trade:
So, what should a trader do?
- Use stop losses. Only risk losing 1% of your total trading capital on any one trade by using stops and position sizing, and when you’ve lost that 1%, get out. The key to proper risk management is proper position sizing, stop losses and volatility understanding.
- Enter trades at new high breakout points, key price support levels, or key moving average support levels. If it loses that support later and is unable to reclaim it, sell it.
- When a stock is one ‘R’ multiple above a key support level, buy it; sell it when it falls back and loses that level. (One ‘R’ multiple equals 1% of total trading capital.)
- Use a ‘stale’ or ‘time’ stop: Set a time limit on how long you will give a trade to move a certain amount; if it does not move quickly enough, exit.
- Volatility stop: Exit if the market or your stock has a big expansion in its daily price range, or if it begins to stop against you for the entire daily range. You either reduce the size of your position or exit due to increased risk as a result of volatility expansion.
- Trail your winner with a stop loss. You sell when it reverses and reaches that stop. A moving average or a percentage of your gain can be used as a trailing stop.
- Sell your position because you have discovered a much better trade with a higher probability of success or a larger upside.
- The key is to always have a plan in place to exit any trade before you enter it. Before the start of each trading day, consider what you will do based on where your trade is and where it may go.
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