Traders spend hours fine-tuning entry strategies but then blow out their accounts taking bad exitsIn fact, most of us lack effective exit planning , often getting shaken out at the worst possible price. We can remedy this oversight with classic strategies that can enhance profitability.

    Before we jump into the strategies, we'll start with a look at why the holding period is so important. Then we'll move into the misunderstood concept of market timing , then move on to stop and scaling methods that protect profits and reduce losses.

    Key Takeaways

    • Many traders design strong exit strategies, but then don't follow through when the time comes to take action; the results can be devastating.
    • When making your plan, start by calculating reward and risk levels prior to entering a trade, then use those levels as a blueprint to exit the position at the best price, whether you're profiting or taking a loss.
    • Market timing, an often misunderstood concept, is a good exit strategy when used correctly.
    • Stop-loss and scaling methods also enable savvy, methodical investors to protect profits and reduce losses.

    Holding Periods

    It's impossible to talk about exits without noting the importance of a holding period that synergizes well with your trading strategy. The magic time frames roughly align with the broad approach chosen to take money out of the financial markets:

    • Day Trading : Minutes to Hours
    • Swing Trading: Hours to Days
    • Position Trading: Days to Weeks
    • Investment Timing: Weeks to Months

    Pick the category that aligns most closely with your market approach, as this dictates how long you have to book your profit or loss. Stick to the parameters, or you'll risk turning a trade into an investment or a  momentum play into a scalp . This approach requires discipline because some positions perform so well that you want to keep them beyond time constraints. While you can stretch and squeeze a holding period to account for market conditions, taking your exit within parameters builds confidence, profitability, and trading skill.

    Market Timing

    Get into the habit of establishing reward and risk targets before entering each trade. Look at the chart and find the next resistance level likely to come into play within the time constraints of your holding period. That marks the reward target. Then find the price where you'll be proven wrong if the security turns and hits it. That's your risk target. Now calculate the reward/risk ratio , looking for at least 2:1 in your favor. Anything less, and you should skip the trade, moving on to a better opportunity.

    Focus trade management on the two key exit prices. Let's assume things are going your way and the advancing price is moving toward your reward target. The price  rate of change now comes into play because the faster it gets to the magic number, the more flexibility you have in choosing a favorable exit.

    Your first option is to take a blind exit at the price, pat yourself on the back for a job well done and move on to the next trade. A better option when the price is trending strongly in your favor is to let it exceed the reward target, placing a protective stop at that level while you attempt to add to gains. Then look for the next obvious barrier, staying positioned as long as it doesn't violate your holding period.

    Slow advances are trickier to trade because many securities will approach but not reach the reward target. This requires a profit protection strategy that kicks into gear once the price has traversed 75% of the distance between your risk and reward targets. Place a trailing stop that protects partial gains or, if you're trading in real-time, keep one finger on the exit button while you watch the ticker . The trick is to stay positioned until price action gives you a reason to get out. 

    Image by Sabrina Jiang © Investopedia 2020

    In this example, Electronic Arts Inc. ( EA ) stock  sells off in October, undercutting the August low. It remounts support two days later, issuing a 2B Buy signal, as defined in the 1993 classic "Trader Vic: Methods of a Wall Street Master." The trader calculates reward/risk as follows, planning an entry near $34 and a stop-loss just below the new support level:

    • REWARD TARGET (38.39) - RISK TARGET(32.60) = 5.79
    • REWARD = REWARD TARGET (38.39) - ENTRY (34) = 4.39
    • RISK = ENTRY (34) - RISK TARGET(32.60) = 1.40
    • REWARD (4.39) / RISK (1.40) = 3.13

    The position goes better than expected, gapping above the reward target. The trader responds with a profit protection stop right at the reward target, raising it nightly as long the upside makes additional progress.

    An effective exit strategy builds confidence, trade management skills and profitability.

    Stop Loss Strategies

    Stops need to go where they get you out when a security violates the technical reason you took the trade. This is a confusing concept for traders who have been taught to place stops based on arbitrary values, like a 5% drawdown or $1.50 under the entry price. These placements make no sense because they aren't tuned to the characteristics and volatility of that particular instrument. Instead, use violations of technical features—like trendlines , round numbers, and moving averages —to establish the natural stop-loss price.

    Image by Sabrina Jiang © Investopedia 2020

    In this example, Alcoa Corporation ( AA ) stock rips higher in a steady uptrend . It stalls above $17 and pulls back to a three-month trendline. The subsequent bounce returns to the high, encouraging the trader to enter a long position , in anticipation of a breakout .

    Common sense dictates that a trendline break will prove the rally thesis wrong, demanding an immediate exit. In addition, the 20-day simple moving average (SMA) has aligned with the trendline, raising the odds that a violation will attract additional selling pressure.

    Modern markets require an additional step in effective stop placement. Algorithms now routinely target common stop-loss levels, shaking out retail players, and then jumping back across support or resistance. This requires that stops be placed away from the numbers that say you're wrong and need to get out. Finding the perfect price to avoid these stop runs is more art than science.

    As a general rule, an additional 10 to 15 cents should work on a low-volatility trade, while a momentum play may require an additional 50 to 75 cents. You have more options when watching in real-time because you can exit at your original risk target, re-entering if the price jumps back across the contested level.

    Scaling Exit Strategies

    For a scaling exit approach , raise your stop to break even as soon as a new trade moves into a profit. This can build confidence because you now have a free trade. Then sit back and let it run until the price reaches 75% of the distance between risk and reward targets. You then have the option to exit all at once or in pieces.

    This decision tracks position size as well as the strategy being employed. For example, it makes no sense to break a small trade into even smaller parts, so it is more effective to seek the most opportune moment to dump the entire stake or apply the stop-at-reward strategy. 

    Larger positions benefit from a tiered exit strategy, exiting one-third at 75% of the distance between risk and reward targets and the second third at the target. Place a trailing stop behind the third piece after it exceeds the target, using that level as a rock-bottom exit if the position turns south. Over time, you'll find this third piece is a lifesaver, often generating a substantial profit.

    Finally, consider one exception to this tiered strategy. Sometimes the market hands out gifts, and it's our job to pick the low-hanging fruit. So, when a news shock triggers a sizable gap in your direction, exit the entire position immediately and without regret, following the old wisdom: Never look a gift horse in the mouth.

    What is Exit short?
    Exit – is selling the stock. LONG – is BUY and then later SELL. SHORT – Is sell first then cover up and Buy later – All same Day. more
    How short is Too Short for guys?
    Anything less than 6ft is considered short. more
    Are short sellers evil?
    Wall Street "short sellers" are often cast as villains. They make money when most others are losing it — that is, when stock prices fall. In recent weeks they were painted as the enemy again, when hedge funds made bets that prices would fall for several so-called "meme stocks" like GameStop and AMC. more
    What is a seat that provides access to the exit or has direct access to an exit?
    Aircraft dispatcher. What is a seat that provides access to the exit or has direct access to an exit? Exit seat. more
    Are short squeezes good?
    A short squeeze accelerates a stock's price rise as short sellers bail out to cut their losses. Contrarian investors try to anticipate a short squeeze and buy stocks that demonstrate a strong short interest. Both short sellers and contrarians make risky moves. more
    How short is short final?
    "Short final" usually means you are very close to touchdown. I'm not sure if there's an official definition, but I usually consider being within 1/4 mile of the runway as short final. It helps other pilots locate you because they can expect to see you very close to the airport. more
    What is short QQQ?
    Key Takeaways. The ProShares UltraPro Short QQQ (SQQQ) is a 3x leveraged inverse ETF that tracks the Nasdaq 100. It seeks to return the exact results of the Nasdaq 100 index times negative three. This ETF follows the Nasdaq 100, which is heavily weighted toward technology and telecommunications stocks. more
    How short is too short for shorts?
    Currently, shorts should stop at the top of your kneecaps (at the longest). Specifically, they should end two-to-four inches above the top of your kneecap. Look for shorts with a 5”-9″ inseam. Yes, just as with tailored pants, shorts are measured along the inseam. more
    How short do you have to be to be considered a short stack?
    What is Short Stack in Poker? A short stack is any player that has less than the usual amount of chips for a certain game. As an example, in cash games, many players rebuy if their stack falls short of 100bb. As such, any cash game player with a stack less than 100bb may be referred to as a short stacker. more
    What is short-term financial planning Why is short-term financial planning so important especially in survival stage?
    Companies develop short-term financial plans to meet budget and investment goals within one fiscal year. These plans have a higher degree of certainty compared to long-term plans. Short-term plans often are amended as financial and investment goals change. more
    What financial ratio serves as a short term indicator of the company's ability to pay its short term liabilities from its short term assets?
    The current ratio The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables. more

    Source: www.investopedia.com

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