When putting money into the stock market, whether day trading or longer term most people worry about the entry. Is the stock too high? Will it keep going lower? Will it be affected be the overall market conditions?
These are all valid questions and do play an integral part in any investment or trade. The one thing almost no one takes into account is where and how do I exit a trade, and this question is valid for a day trade, swing trade (few days or weeks), or a long term investment (3 months to multi years). I would argue that the exit is more important than the entry. Sure if you screw up and really do buy at the wrong time (shorting also, but that is another topic) you can be assured of a loss. However, more often than not, people are pretty good at entry of stocks, assuming they are not chasing hype and have been patient with their method. The place they mess up is the exit. There are no real rules. Once you have made some money on a stock, it is easy for greed to take over. “I don’t want to sell too early, it might keep going,” or “The last time I sold when I made xx amount, I could have made 10 times that much." Every stock entry, before you even place the order, should have an exit strategy worked out.
Exit strategies can include the following, and apply to everyone from an exper to those who want to learn to trade:
1. Trailing Stop - A price below the peak gain price where you will take profits if the stock reverses and starts to sell. The trail will follow the price up higher, but usually does not move down. You can also use a trail of x % or y cents below the low of the just completed bar.
2. Scale Out - Take the trade and then get out of a portion of it at fixed gain intervals. One example (especially for investing longer term), if you own a stock and get a gain of 25%, sell 1/4 of the position. Once it rises to 50% gain on the balance, sell 1/2 of what you have left. This has locked in a 25% gain on the orignial purchase price. The balance of the position should be locked in at breakeven - which means if it starts to go against you that means you will not let it go into a loss. On the balance of the shares, if it takes off strongly after a 50% gain, look to just exit the balance and move on to another trade. For intraday stuff, usually you will want to scale out of half after a decent push of say 1/2% and move your stop up on the balance.
3. Forever Investment - If you have a stock that you really think will be a winner for the long haul, once you get a 100% gain on it you should immediately sell 1/2. Why? Because once you sell half the position, you have done a great thing. You have pulled out your original investment out of the trade and still have 50% of it working. Best of all, even if the company goes bankrupt, you cannot really lose. Ever. Take the 50% you gained out, and then try to find two different ideas that may do the same. One thing every investor should keep in mind is the rarity of Walmart and Home Depot type companies. Even if you have locked in this part, be aware that tons of companies do superb for years, then the market changes and they bite the dust. It is super rare to find a new Proctor&Gamble or Microsoft. In addition to other rules, you should also have a "lock it in" price if acheived you will just take the gain and get out of all of it.
4. Price Target - A fixed price from your entry price where you will exit if it gets hit. For example you might purchase a stock at 12, but be very happy if it went to 15 in a month or 2. So that is your exit. Price targets are dependent on the expected holding time - in general the longer the expected hold, the bigger the expected gain within reason. The key to remember here is you have to take what the stock is capable of doing, not what you want the stock to do.Price targets can be figured out by looking at near term support and resistance also. In general, if the stock has to push a decent amount to your target, and your target you want is just beyond a resistance point, you should move the target down to underneath the resistance for a better chance of hitting it.
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