Exit Strategy in Trading – Concept, Importance, How To Exit, Tips, Strategies & More
The majority of the traders tend to get swayed in emotions and enter the market without any Exit Trading strategies.
If you are also one of those traders then let us tell, you are most likely to run losses. Or take premature profits.
All we say is that as a trader, you must understand the available exits and create an exit strategy accordingly.
As you enter the market, you also exit the market. Irrespective of the type of trader you are, one thing is for sure money management is a crucial aspect which you just can’t neglect.
Ideally, traders spend a lot of time to enter the trades. But they simply may end up blowing out their portfolios by taking insufficient exits.
Additionally, almost all traders don’t understand how to exit the trade effectively. Due to the lack of skills, traders exit the market at low prices.
But you don’t need to worry as we have got your back by providing you some of the best strategies. The classic strategy can help you in improving your profitability.
The only reason traders don’t have an exit strategy is that they tend to follow a rule that buys low and sells high.
But to get the most of this rule, they need to develop a rationale strategy to purchase the securities when the prices dip down.
About Exit Strategy in Trading
The prices of underlying securities tend to change direction without any prior notice based on some headlines.
Due to which traders can incur huge losses where they expect a massive amount of profit.
It is the only reason why experts say that traders must have exit strategies so they can avoid an emotional trading response.
For instance, without an exit strategy, a trader becomes too confident about the continuation of the trend or too nervous about market sustainability.
In such cases, traders might miss an opportunity or make a premature exit. But before moving ahead with strategies, you must learn about some basic terms:
If you don’t talk about the essence of the holding period, which syncs with your strategy you can’t exit the market.
Roughly the time frames link with the broader term to make money out of the financial markets. The holding periods include swing trading, day trading, investment, and position timing.
You can choose the category based on the market approach. These categories dominate the position whether you book profit or loss.
Timing of the Market
Before entering any trade, as a trader, you must understand both risk and reward targets. All you need to do is follow some charts and look for the potential resistance level amid the time limits.
It will help you learn about the potential reward. In a similar way, you can look for a price that proves you wrong if the stock hits it. You can also evaluate the risk /reward ratio.
Furthermore, you must skip the trade if you find the ratio less than 2:1. And move on for a more significant position. You need to focus your trade on two exit strategies.
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How to Exit a Trade?
The only ways where you can exit a trade are either by making a profit or taking a loss. When it comes to exiting the strategies, we can say take profit and stop loss.
It is all about the type of exit you make. In technical terms, the abbreviation traders use are T/P” and “S/L.”
If you want to exit a strategy, then you can ask your broker to sell equities at some point automatically. The brokers implement stop loss when this price or point is achieved.
It instantly converts the market order to sell. If the market chooses to move against you, then the stop loss strategies can help you avoid losses.
Some of the rules or conditions applicable to stop-loss orders are:
- Traders always place this order beyond the current asking price, when it comes to buying or below the existing price when it comes to selling.
- When the price works on the stop prices, some stock indices, including NYSE, allow you to gain rights on the next sale.
The type of stop losses includes good’ til canceled, trailing stop, and day order.
Just like stop losses, the take profit or limit orders are transformed to market orders until market orders to sell point is achieved.
The only difference between take profit and stop losses is that there is no trailing point.
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Tips to Develop an Exit Strategy
Here are few tips that will help you built an Exit Strategy in Trading –
How long do you plan to stay in this trade? Basically, it all depends on the type of trader you are.
If you are a long-term trader, then you must focus on some core areas. Including setting the profit targets you plan to achieve in some years.
You can also develop trailing stop points, which allow you to lock profits for years. If you are a short-term trader, you can set some goals based on technical or fundamental elements.
Risk Taking Capacity
How much risk can you take? When it comes to investing, risk plays a crucial role. In simple terms, risk defines how much money can you afford to lose?
It will decide the trade length and stop-loss type you can implement. You can use tighter stops if you are not willing to take a lot of risks.
On the other, you can get a more expansive room if you take more risk.
Objective of Trading
Where do you want to exit the market? The question is all about – do you want to make a profit or make an exit point.
When your stock is performing great. Often traders are irrational about their holdings as they at times worry and sell the stocks.
Or they keep on holding the stocks even when the changes prevailing in the market. In such situations, traders tend to lose a lot of opportunities, which indicates profit.
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Some Standard Exit Strategies in Trading
Here are some of the most common Exit Strategy a trader or investor uses –
Exiting on Weakness
If you are a long term trader, then this strategy is quite ideal for you. The strategy is all about a simple approach to learn about a weakness or a correction to learn about the exit level.
Amid this approach, the investors and traders most likely assume that the trend will continue. They might also think of profits in the future.
Traders consider using moving averages and other types of indicators, to learn about the weakness of the trends for exiting the trend.
Exiting on Strength
If you are a short-term trader, then this strategy is perfect for you. In this strategy, a trader mainly looks for a strong signal in the initial entry direction of the trade. It is mainly to exit the trend.
The main aim of this strategy is to book some profits before other traders book it. And there are chances of a potential reversal.
The risk of this approach is that traders tend to ignore the position. Traders use indicators like percentage ATR exits, oscillator extremes, and pivot targets to learn about the strength of the trend.
Limit using Resistance and Support
Under this strategy, the traders mostly put a limit close to support and resistance levels. They do so to have an optimistic risk to reward ratio.
Traders start with looking at the swing in charts to a greater level and also set stop loss at some pips more significant than the specific target.
To set a limit, traders tend to implement the risk-reward ratio.
Trailing Stops based on Moving Averages
Under this strategy, the traders mostly set stop losses on a revamped basis throughout the trade time. It depends on where the price relates to the moving averages.
It is a sign that the trend of the price is shifting if the price moves beyond the line of moving averages.
During such a situation, a trader most likely chooses to exit the trend. An essential aspect of this strategy is that the trader continuously needs to keep a tab on the shift of prices.
Volatility bases Strategy
In this strategy, the traders tend to consider the average size of the swings of the price in the market during a specific period. It mainly helps in setting stop losses and limits.
Traders mostly use volatility indicators to use this strategy. ATR or average true range indicator is an example of one such indicator.
The idea here is to determine the complete range of prices that are in practice during a specific duration. By using this indicator, the traders can establish exit points.
And it also doesn’t need any new upgrades for the trade’s time.
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Exit Strategy in Trading – Conclusion
There are a plethora of approaches available today to create exit strategies. These strategies help you in limiting the amount of risk that traders tend to assume with the enhancing odds for earning profits.
You can make profits even when the markets seem unprofitable. Above all, research says that the majority of the traders tend to lose profits if they don’t have a proper exit strategy.
Hence, exiting strategies play a crucial role.
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