Exiting a Trade at the Right Time
Just as a trader questions when to enter a trade, the question to exit a trade is just as common. The simplest answer is, when your trade hits your stop loss. Every trader takes stop losses and the first step to successful trading is learning to control your trades by exiting a trade when it hits your stop loss. A trader should never ‘not’ exit a trade when it hits their stop loss just because they *think* the stock is going to turn around. There are times when a trader takes a stop loss, the stock will turn around and sometimes, the stock may move to the point where the trader could have seen gains versus losses on a trade. However, the odds are stacked against a trader not taking out a stock when it hits their stop loss and holding out ‘on hope’ that the stock will turn around. A majority of the time, if a trader does not exit a trade when it hits their stop loss, they either become a long term investor or inevitably, increase the amount of loss they were originally prepared to take. After all, a stop loss is just that, a loss.
The best time to exit a trade is when there is a profit. Individuals new to day trading should test their exit strategy by demo trading. At no time should a new trading method be tested while trading live, with real capital. That’s called ‘capital suicide’. New day traders should consider (while demo trading) exiting trades after they reach a minimum percentage or minimum dollar amount in gains. The minimum gain amounts have numerous depending factors: number of shares traded, amount of capital (demo cash) involved per trade, volatility of stock trading plus, loss risk tolerance. Each of these minimum gain amounts are determined by the trader and no one can fill in the blanks but the trader whose real cash will be on the line. A trader may develop several exit amount strategies all dependent upon the various factors listed or those determined by the trader. Traders may also add other factors to their exit strategies but should at no time, decide to increase the minimum gains just because they need to profit more without previously testing the method.
Traders may consider creating a chart for their exit strategy depending upon their individual exit preferences by number of shares traded, amount of capital involved per trade, volatility of stock, etc. Such an exit strategy chart enables a new trader the opportunity of aiming toward specific demo profit goals without having to sweat out computing their exits after each trade is made. As a trader becomes more experienced, they will fine tune and enhance their exit strategy, thus increasing their potential profits as well as, improving their exit discipline.
Just as a trader will take a stop loss, a trader will leave money on the table. One of the keys to successful exiting of a trade is doing so into the run and not when it is done. When a trader exits into the run, either long or short, they will leave money on the table but making profits and leaving money on the table sure beats taking a loss and having no gains at all. This is one of the reasons Moderators in the Trading Rooms at Millennium-Traders post ‘Consider Taking Some Profits’ calls, in their Day Trading Rooms.
When a trader is in a long position, the best time to exit is while the stock is moving higher. A trader should not wait until a stock has reached its top on a particular run and has begun to turn lower to exit or they may find themselves chasing to exit the trade or possibly even taking a loss when they had a potentially winning trade.
When a trader is in a short position, the best time to exit is while the stock is moving lower. A trader should not wait until a stock has reached its bottom on a particular run and has begun to turn higher to exit or they may find themselves chasing to exit the trade or possibly even taking a loss when they had a potentially winning trade.
Remember, any and all new trading strategies should be tested via demo trading and at no time should a trader test any strategy while trading live. Traders and day traders may consider a training session with one of the professionals at Millennium-Traders, One-on-One Training for Stocks, Futures or Forex.