Basic as well as Effective Leave Trading Methods
Focus trade monitoring on the 2 crucial exit costs. You have extra options when watching in actual time since you can exit at your initial danger target, coming back if cost leaps back across the opposed level. Place a routing quit behind the 3rd item after it surpasses the target, utilizing that level as a rock-bottom departure if the position transforms southern.
It's impossible to talk about exits without noting the importance of a holding period that synergizes well with your trading strategy. These 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. (See also: What Is the Difference Between Investing and Trading?)
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. (For more, see: Calculating Risk and Reward.)
Focus trade management on the two key exit prices. Let's assume things are going your way and advancing price is moving toward your reward target. 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 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 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. (See also: Protect Yourself From Market Loss.)