Money management is one of the most important (and least understood) aspects of trading. For example, many traders enter the trade without taking any action. exit strategy and they are often more likely to make a profit prematurely, or worse, make a loss. Investors should understand which exit routes are available to them and try to create an exit strategy that will help minimize losses and keep profits stable.

How to Exit a Trade

There are only two ways to exit a trade: at a loss or at a profit. When we talk about exit strategies we use these terms: take profit And stop loss orders referring to the type of exit made. Sometimes these terms are abbreviated by traders as “T/P” and “S/L”.

Stop Loss (S/L) Orders

Stop losses or stops are orders you can place with your broker to automatically close a position at a certain point or price. Once this point is reached, the stop loss will immediately be converted to a stop loss. market order. These can be helpful in minimizing losses if the market moves quickly against you.

There are several rules that apply to all stop-loss orders:

• Stop losses are always set above the current level ask for price on a purchase or below the current price bid price on a sale.
• Nasdaq The stop loss becomes a market order when the stock is quoted at the stop loss price.
• AMEX And New York Stock Exchange Stop losses allow you to be entitled to the next sell in the market when the price trades at the stop price.

There are three types of stop-loss orders:

1. Good until canceled (GTC) – Such orders remain valid until a trade is executed or you manually cancel the order.
2. day order – The stop loss expires after one trading day.
3. stop at the end – This stop loss occurs at a certain distance from the market price.

Take Profit (T/P) Orders

take profit or limit ordersThey are identical to stop losses in that they are converted into market orders to close the position when a point is reached. Moreover, take profit points follow the same rules as stop loss points in terms of application on the NYSE, Nasdaq and AMEX exchanges.

But there are two differences:

1. There is no “next” point. (Otherwise you’ll never make a profit!)
2. starting point must be for profit. (Below the market price for a short trade and above the market price for a long trade.)

Exit Strategy Development

There are three things to consider when buying. developing an exit strategy.

1. How Long Do I Plan to Be in This Trade?

The answer to this question depends on what type of trader you are. If you are in this business for a long time (more than a month), you should focus on the following:

• Adjustment profit targets will be hit in a few years, which will restrict your trading amount.
• Developing trailing stop losses that allow frequent profit locking to limit your profit downside potential. Remember, the main goal of long-term investors is usually to protect their assets. capital city.
• Making profits in increments over a period of time to reduce volatility while liquidating.
• Allowing for volatility so you can keep your trades to a minimum.
• Creating exit strategies based on long-term fundamental factors.

However, if you are making a short-term trade, you should pay attention to the following points:

• Setting short-term profit targets that are implemented at appropriate times to maximize profits. Here are some common application points: pivot point levels, Fibonacci/gann levels, trend line breaks and other technical points.
• Developing solid stop losses that will immediately get rid of underperforming assets.
• Creating exit strategies based on technical or fundamental factors affecting the short term.

2. How Much Risk Am I Ready to Take?

Risk is an important factor when investing. While you determine risk levelYou determine how much you can afford to lose. This will determine the length of your trade and the type of stop loss you will use. Those who want less risk tend to set tighter stops, while those who take on more risk have more generous room to move downwards.

Another important thing you need to do is set your stop losses so that they are not affected by normal market volatility. This can be done in several ways.

beta indicator can give you a good idea of ​​how volatile the stock is relative to the market overall. If this number is between zero and two, you will probably be safer with a stop loss around 10% to 20% lower than where you bought it. However, if the stock’s beta is above three, you might consider setting a lower stop loss or finding a key level you can trust (like a 52-week low). moving average or any other important point).

3. Where Do I Want to Quit?

Why take profit or starting pointWhere do you sell when your stocks are performing well? Many people become irrationally attached to their partners. holdings and hold those stocks when the underlying fundamentals of the trade change. On the other hand, traders sometimes get worried and sell their assets even if there is no change in fundamentals. Both of these situations can lead to losses and missed profit opportunities. Determining the point at which you will sell takes the emotion out of trading.

The output point itself must be set to a critical point price level. For long-term investors, this is usually around a key milestone, such as the company’s annual target. For short-term investors, this is often determined by technical points such as certain Fibonacci levels. pivot points or other similar points.

Putting it into action

It is best to enter exit points immediately after the primary trade is placed.

Investors can enter exit points in one of two ways:

1. Most brokers trading platforms It has functionality that allows entering orders. Alternatively, many brokers allow you to call them to place entry points on them. But there is one exception: Many brokers do not support trailing stops. As a result, you may need to recalculate and modify your stop loss at certain time intervals (for example, every week or month).
2. Those who do not have the opportunity to enter orders can use a different technique. Limit orders are also executed at certain price levels. By placing a limit order to sell the same amount of shares you hold, you are effectively placing a stop loss or take profit point (since the two positions will cancel each other out).

In conclusion

Exit strategies and other money management techniques can greatly improve your trading by removing emotion and reducing risk. Before entering a trade, consider the three questions listed above and determine a point at which you will sell at a loss and sell at a gain.