Trading Exit Strategies
As important as it is to know when to enter a trade, it is equally crucial to also be able to identify the best exit points. We often find traders who give their all into establishing the best entry strategy, and then boom! - their accounts are being blown out just because they have taken a bad exit. So let’s have a look on what is a good exit strategy and which are the parameters that we should consider..
1. Market timing
First, decide on your holding period, meaning the period you are willing to hold your position open depending on your trading style. So if you are a day trader, your holding time is roughly minutes to hours; Swing traders tend to keep their positions open for hours to days; Position traders hold their trades for days to weeks and last, investors, keep them for weeks to months. After settling on the best holding time for your investment, go ahead and establish your risk and reward targets before entering each trade. Most traders opt for at least a 2:1 ratio.
2. Stop Loss Strategies
Even the most advanced and successful investors don't close every position with a profit and have a plan on how to minimise their losses, by taking them into consideration when opening and closing a trade. Place your Stop Loss points strategically, always in tune with the characteristics and volatility of the instruments you are trading. Traders normally aim to place their stop losses at the point where the market indicates to them that their initial projections were probably wrong.
3. Scaling Exit Strategies
Considered to be another important exit strategy, scaling out of a position means to close your trades in portions, once these portions reach specific points set by you. For example, if you have an open position of 600 shares, you may choose to close 1/3 of it when you reach a profit of $1000, another third when your profit jumps to $2000 etc. Remember that this strategy tracks position size, meaning that it would make sense to employ it for bigger trade sizes. After all, it wouldn't make sense to break a small trade into smaller parts.
The bottom line is that an effective exit strategy can boost your confidence and build your trade management skills even more. Start by calculating your risk/reward levels prior to entering a trade and use them as a blueprint to exit your positions at the most advantageous price. But don't forget - take everything with a grain of salt and always do what you feel is best for your own trading style and strategy.
Information Source: //bit.ly/2OSSK9j
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