Entries/Exits: In its Simplest Form: Part 1
Ok so you’ve found what materializes to be a great trade. All your signals and trade triggers line up, and you’ve got a potential winner with minimal risk. Now what! Many traders use many different strategies to exit, and well some have none at all. I think once you become a seasoned trader the entries take care of themselves. My own strategy for exiting a trade varies on several conditions. What stock am I trading? Am I familiar with how this stock trades? How are stocks trading in general for the day? Are they following through, or are they only making small moves only to fall right back? These are some of the more general questions I ask myself when taking a trade. Some of the more technical aspects of exits are as follows. First before I put a trade on, I always want to know where my initial exit will be if I am wrong about the direction of the trade. I emphasize always! I trade NYSE stocks; therefore I generally use a combination of a minor support area on the charts, and the NYSE open book. I will look for several orders in the book within my risk tolerance; this will vary from trader to trader. If my position falls back to either one of those levels with some kind of force against it I will exit, it’s pretty much that simple. This is not a 100% approach, because at times the stock will gap through these levels, but it has been very effective for me in minimizing loses. More times than not there are enough shares there to exit the position. There is a little more of an art to this strategy, but those are the basics of it. I will try and get into more detail later on.
Now onto exiting the position once it is building in your direction. First of all, ask why you have entered the trade, and have those conditions changed since your entry. This in itself may be a signal to exit, at least half of your position. Second is there a sudden counter against you? This may also be grounds to exit at least half of your position. Watch the tape. In which direction are the prints going off? Do you have a target price for the trade? It is sometimes not a bad idea to take off at least half of your position at or near your predetermined target. Especially if you have a sudden up thrust, if you are long or down thrust if you are short. Up thrusts and down thrusts will often retrace. I am a very short term trader, so my time frame is a lot smaller than others. My favorite trades are the overshoots where they build up a spring like entry point, and then burst in one direction or the other. I will often offer out half of my position up near a resistance point or down at support level, and many times get that filled at a better price. Sometimes the stock may follow through. That is the point of exiting half; I have locked in some profit, and can now let the rest ride until my next exit signal. Moving averages make for a great exit strategy also, but I always like to see in the nyse book that I have a place to exit as the stock moves in my favor. As for chart reading, I find a 5 period sma to be very effective with a 15 period ema used as an exit point depending on the distance price wise. That will vary depending on your risk tolerance. I will get into more detail with that in another post. I hope I have shed some light on the subject, and offered some additional information for anyone reading this. For more info go to TraderMike, he has a great post on the subject of entries and exits.