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How to plan your trade exits

Posted on 11th Dec 2017
How to plan your trade exits

It is crucial to learn to spot trading opportunities and make profit but the necessity of knowing when to exit any trade is also equally critical. Each investor aims to garner profits, but he/she should also use proper risk management techniques to avert losses and protect his/her account over the longer-term. You can exit your trading position either with a profit or loss. Exiting trades is not easy for most traders but it need not be that way. Knowing your exit point is what ultimately sets apart winners from losers in the investing world. Losses are inevitable and successful traders never jeopardise more than they are comfortable with losing on any one trade. Traders without prudent exit procedures in place put everything at stake. Thus, it's important that you have a good exit plan in place in case the trade goes against you. Here are various ways to exit a trade and achieve a steady balance between letting profits run while being prepared for sudden market reversals.

  1.  Trailing stop: The trailing stop is the most popular profit taking method. It allows the market to run, but makes you leave during a likely reversal. As the price turns in your favour, an exit order moves simultaneously, trailing the price by some specified amount. For instance, suppose you buy an asset and place a $0.67 trailing stop. As the price shoots up the trailing stop goes up too, always staying $0.67 below the latest high. It merely moves higher and never lower. This lets the market move in your favour without any time limit, but bails you out once the asset moves $0.67 against you (from the highest point). A trailing stop works similarly for a short position, and will always trail the lowest rate. Few indicators have an inbuilt trailing stop like Volatility Stops, Chandelier Exit, Bollinger Bands etc. The trailing stop gives best results in strong trends, but if the trend is erratic it will lead to ill-timed exits.
  2.  Profit target: Establishing a profit target is an excellent method of deciding your potential reward relative to your risk. You may make few losses on trades but overall your trade should be successful. Generally, price targets are used for trading through charts. The disadvantage of using a set price limit is that there is no flexibility. The price could miss the target and do an about turn. To avoid this, you can track the price as it nears your target; if it is nearly close to the target and then reverses, exit the trade.
  3.  Using limit orders: A trade can be ended manually or by fixing a limit order which will by default end your position at a profit level decided by you. This can make you more disciplined and will enable you to adhere to your trading plan. One way could be to place your profit level at, or a tad bit lower, than the most-recent substantial support or resistance level. You need not exit the trade all at once. You can slowly retrench your position thereby locking in profit, either manually or through limit orders.
  4.  Exiting with a loss: Even the most successful investors don’t attain profits on every trade. Hence, it is but logical to exit a trade that isn’t working so that your losses are minimised. Set a stop loss at the point that the market signals that your initial projection may have been wrong. With this plan you will be out of a trade with a potentially minimal loss.
  • Exit strategies and other money management techniques can improve your success rate by controlling emotion and cutting risk. There is no definitive way to exit a profitable trade. While one method will show desirable results for few trades it might flop in case of other trades. As a savvy investor decide on a method that works for you and adhere to it. By coming up with a suitable trading methodology you can find out what works and what doesn’t, so you can readjust your strategies accordingly. Using the right exit strategies will help you to make the most out of any market movement.

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