In trading, the money is not made in the entry, it is in the exit. The art of the exit is crucial to a trader’s success in the markets. Profits can disappear if you do not take them at the right time, and small losses can become huge losses if you do not cut them short. Small profits can become huge profits if you let them run until they truly stop moving in your favor. Keeping capital tied up in a trade going nowhere can cause you to miss out on other great opportunities.
So what is a trader to do?
- Use stop losses. Only risk losing 1% of your total trading capital on any one trade through the placement of stops and position sizing, and when you have lost that 1%, get out. Position sizing, stop losses, and understanding volatility is the key to proper risk management.
- Enter trades at break out points to new highs, off key price support levels, or key moving average support levels. If it loses that support later and fails to retake it, then sell it.
- Buy when a stock is one ‘R’ multiple above a key support level, and sell if it falls back and loses that support level. (One ‘R’ multiple = 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 fails to move enough fast enough, get out.
- Volatility stop: Stop out if the market or your stock has a big expansion in its daily price range, or starts moving against you the full daily range. You either cut your position down in size, or get out due to increased risk based on volatility expansion.
- Trail a stop loss behind your winner. When it reverses and hits that stop, you sell. A trailing stop can be a moving average or a percentage you your gain.
- Sell your position because you have found a much better trade with a better probability of success, or a bigger upside.
The key is to always have a plan to get out of every trade before you get in. Before each trading day begins, think about what you will do based on where your trade is at, and where it may go.