Exiting a Trade
Exiting a trade is one of the quickest ways to make any trader, experienced or not, hesitant.
Picture this, you’re looking at a trade and there are several possible outcomes. Option 1: You exit the trade too early, and miss out on a ton of profits. Option 2: You exit the trade at the perfect time, and make a ton of money. Option 3: You exit the trade too late, and miss out on a ton of profits (again). In some cases, you might even end up losing money because you exited too early or too late.
Just there, you’re looking at a two-thirds chance of missing out. So now you see the dilemma.
If you exit a trade too early, you could be leaving profits on the table. However, if you exit a trade too late, there’s a chance there won’t be any profits left at all.
There’s a massive level of psychology that goes into exiting a trade, and there’s the common saying of “let your profits run.” This leads to a whole lot of confusion because some people can run for hours or days, while other people can barely jog, much less sprint.
So where do you stop running?
A lot of knowing when to exit a trade lies in your trading plan and what you’re comfortable with. But there’s also some really sound advice out there on general practices to follow.
Profit Taking Strategy
One key strategy for knowing when to exit your trade is by taking advantage of partial profit booking using regular targets. In other words, before you start your trade, determine your targets and as they’re reached, take some portion of your position off for profit. What target you’re looking at and how much you’re taking off is where your comfortability and trading plan comes in. But generally traders will take off a third or half of their position once the first target is hit.
This provides several benefits. The first is that it’s a bit of a cushion in the case of a shift in market direction. Something we all know too well as traders. The market loves volatility and sometimes a whole lot of it. So if you take off some of your position before a directional shift, you can at least book some profit from the trade. Whereas, if you don’t, you’ll be looking at a market going against you and your portfolio taking a hit. Again, something we all know too well as traders.
The other benefit is that with leaving some of your position still on, there’s potential for additional profit gains. You can’t make profit if you’re not on the board. Plain and simple. It’s kind of like the idea of not putting all your eggs in one basket.
But of course not everyone has the same exit strategy, so that’s why it’s important to find exit indicators that match your style. One such indicator is the Dynamic Profit Zones Indicator. It came into existence because there isn’t a one size fits all exit strategy. This indicator directly relates back to the above piece of advice – profit targets. It essentially helps you identify appropriate profit targets for the current cycle a stock is in. It enables you to see where the price of a stock is likely to go. The goal is to facilitate the ability to determine if you should get out or stay in for greater profits.
So if you think the above strategy might fit into your style of trading, then this would be a perfect indicator to utilize.
Warning Signs to Exit
Another strategy for when it comes to exiting a trade is paying attention to the writings on the wall. There are some clear indications of when a market is going against you, and you need to get out.
For instance, a sound warning sign to get out of a trade is a market day that has a significantly higher average daily volume than subsequent days prior. This of course can work in your favor, if you’re on the right side of the direction. However, if you’re on the wrong side, you won’t be so happy. This holds even truer, if the adverse swing breaks a key resistance level.
If support is broken, it’s a good time to get out.
Another warning sign deals with moving average crosses (EMAs) and trend changes. If you can just look at the relationship between different EMAs you can determine if danger is on the horizon. For long-term positions, if the short-term descends through the long-term, it’s a good time to get out. Similarly for short-term positions, if the short-term ascends through the long-term, it’s best to exit the trade.
However, the challenge can arise when trying to watch multiple EMAs at one time for different stocks. It can become very easy to miss EMAs crossing over each other on 6 different monitors. Which brings us back to a subsequent point; find an exit indicator that matches this strategy and make your life easier.
For this kind of exit strategy, we recommend the Multi-Cross Indicator. It’s a brand new indicator we have at Simpler Trading, and it was made exclusively for exiting a trade. Basically, this indicator watches a whole slew of different time frames and the respective EMAs. Its goal is to help you identify market turns faster and more accurately. You know that whole thing talked about earlier, shifts in market direction, this is designed to predict those shifts based on EMAs. So then you can exit right before it hits.
An indicator’s goal in life is to take out some of the guess work in trading. Let it.
“These indicators are GAME-CHANGERS! They compliment the other awesome indicators I use! I am now getting consistent profits and am able to have my trades positive for this year … finally!!”
Of course though, the market is an equal opportunity dream crusher, so there’s always some sound advice from our Founder, John Carter. If the ducks are quacking, feed them! Meaning sometimes just take your profits. If you truly don’t know if you should get in or get out, it’s sometimes better to go with the latter. At the end of the day, some profit is better than no profit generally speaking.
(By Simpler Trading)