Trade Exit Strategies for a Profitable Trade
2018-06-12 | Simpler Trading Team
Exiting a trade can be nerve wrecking! If you exit a trade too early or too late, you can miss out on profits. And worse, start losing confidence in your trading ability. It’s a vicious cycle, but remember your goal is to exit the trade at the perfect time, and make a profit.
Ultimately, when you exit a trade it depends on several factors. For example, the rules you’ve outlined in your trading plan. You should always follow your own rules… staying disciplined is key. Here are a few strategies and tools to consider when looking to improve your decision making.
Profit Taking Strategy
One key strategy many traders follow is profit taking, taking advantage of partial profit booking and using regular targets. In other words, before you start your trade, determine your targets; as they’re reached, take some portion of your position off for profit. Your target, and the profit you keep, will depend upon your personal preferences, especially your risk tolerance. Generally traders will take off a third or even half of their position once the first target is hit.
Profit taking provides several benefits. Putting profits aside provides a bit of a cushion in the case of a shift in market direction, which is something we know all too well as traders. Market volatility is always a risk, you will have to take those market shifts into consideration. So if you take off some of your position before a directional shift, you can at least book some profit from the trade. Anyone who is looking to make a living as a trader would benefit from putting aside profits each month to pay their bills.
On the flip side, with profit taking, you still leave part of your position intact, and therefore, you still have the potential for profit further. If there is additional upside, you’ll have a smaller share, but your risk is smaller too.
Stock Market Warning signs
Seasoned traders learn to watch the market, and their charts, for warning signs that tell them it’s time to exit their trades. There are some clear indications of when a market is going against you, and you need to get out.
For example, when the average daily volume is significantly higher than the previous days, it’s a signal that you may want to exit your trade. This of course can work in your favor, if you’re on the right side of the direction. However, if you’re on the wrong side, you won’t be so happy. This holds even truer, if the adverse swing breaks a key resistance level. If support is broken, it’s a good time to sell your position..
Moving Averages and Trends
Watching moving averages and trend changes for price can also give you an important trade exit signal. You’ll want to experiment with different types of moving average lines – exponential moving averages (EMAs) and simple moving averages (SMAs) – at different periods. The calculation and the periods will differ depending on the speed and type of trading you do: EMAs are popular in day trading with the 21 EMA being a staple.
How can you use EMAs? You watch when and how they cross each other. In short-term positions, if the short-term EMA ascends through the long-term EMA, it’s best to exit the trade. For long-term positions, if the short-term EMA descends through the long-term EMA, it’s a good time to get out. It sounds easy, but getting it right takes practice. Following trading mentors who align with your trading goals can help you set up and read charts and make sound trade entry and exit decisions.
Best Indicators to Exit a Trade
Using tools like moving averages or volume are very helpful in trade exit strategies. But keep in mind, there are other sophisticated indicators you can choose that may align with your risk tolerance which can signal you when to exit a trade. Indicators can be easily downloaded into your trading platform to help you maximize your profits. In day trading especially, price movements occur in a moment and trade decisions have to be made quickly. Using an indicator with a clear exit signal can make all the difference in your trading success.
The team at Simpler Trading has compiled some of our favorite indicators. We invite you to download our free ebook, Best Day Trading Indicators. Many of these indicators are also used by swing traders – simple adjustments to time frames, for example, can make the indicator equally powerful for positions held for multiple days or even months. And don’t go it alone. Mastering your exits, and entries, will come faster when you trade with a mentor. Our live trading rooms help traders see first hand how to apply strategies and tools in decision making. For day traders, try our Simpler Day Trading Room. You can get a 7-day trial for only $7. Get started today!