Want to Stay in Trades Longer? First, you must master the right exit strategy

Hey there! My name is Nate and I write about trading for the WOLF Financial newsletter. If you are looking for more trading tips and tricks, I guarantee you’ll enjoy my content on 𝕏, @tradernatehere. Thanks for reading!

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

You know the feeling.

You are in a trade and suddenly feel like maybe now is the time to take profits.

Or maybe it is too early, and you’ll miss out on more gains.

You also don’t want to wait around too long, risking losing the gains you have.

Indecision with money on the line is never a good thing. You want to have a plan in place and more importantly, you want to stick to the plan.

Creating an exit strategy is one of the first, if not the very first thing you should do before entering a trade.

There are many ways to go about it and there is no single best exit strategy. It is just important to have one. That is crucial.

Here are a few to consider.

Stop Orders

As soon as you enter a trade you should also have a stop order placed.

A stop order is an order to sell when the price drops to a specific price which is known as the stop price. (Or if you are in a short trade, it’s the order to buy to close out the position at a specific price).

You select the stop price for these orders and the price you select matters.

If I am trading for upside, I like to use the last point of resistance as a guide and usually place my stop order just below this level.

The idea is to allow for a retest without stopping out of the trade, but still having a stop in place to prevent further declines from hurting your account.

Here’s an example of where I might place a stop loss, using the chart for AMD. This stock has been ripping!

The prior resistance for AMD was right near $180 so I might place a stop loss a little lower, near $175, allowing a pullback to occur without selling my shares.

Another consideration would be using $165 as the stop loss. This does allow for a much larger draw down, but would prevent potentially much bigger losses if shares broke down further.

If you are trading longer time frames, or investing for the long term, your stop loss might allow for more room to pull back. It all depends on your time horizon, expectations, and risk tolerance.

Percentage Based Targets

You may also want to consider setting profit targets based on percentages.

This is a way to help stay consistent and really understand the math behind your trades.

For example, if you decide that allowing for a 10% loss while targeting 30% gains is the right approach you can set your trades up to match these guidelines.

Most platforms will allow you to “bracket” your trades. This means you can set the stop loss and profit taking levels for the trades you enter, and they will automatically populate for you.

Using the example above, you can set a 10% stop loss and 30% profit target on a trade entering shares at $100.00.

Set it and forget it, knowing the max loss is $10 per share and max gains will be $30 per share.

While this strategy can be very effective, some prefer using charts to set these levels.

Support and Resistance Targets

You can also automate using the levels you have identified on your charts as stop loss and profit taking targets.

This approach requires more focus and analysis. You have to pay attention to how far away these levels are because you are not setting consistent percentage levels to trade by.

You typically want to avoid having a stop loss that allows for a larger loss than your potential gains.

There are strategies that allow for taking more risk, but when starting out I recommend keeping the risk to reward ratio in your favor.

Take a look at the chart for TSLA.

You could use the support level of 196.36 as a stop loss or drop a little lower to the anchored volume weighted average price (AVWAP) line near 191.50.

Your upside targets would then be at resistance levels 212.18 and 234.04 with an option to take profits even earlier at another AVWAP line near 207.

From the current price of 202.64, setting stop loss levels just 6 or 11 dollars lower is pretty tight while allowing for gains of 5, 10, and 32.

This could be a decent risk reward set up and the support and resistance levels gave you all of the information needed.

Always have a solid plan for both exiting with a profit as well as exiting to take a loss. This will keep you in the game and improve your mental edge.

Once you have a plan in place, be sure to stick with it.

Have a great week ahead!

-Nate

 @tradernatehere