Most traders spend a lot of time and effort choosing their trade entry points but forget to plan their exits.
But what good is a well-timed and properly executed entry if you are not able to minimize your losses or maximize your winnings?
As you probably learned from experience, the market doesn’t always go your way.
Even if you have done all the fundamental and technical analysis, there is still a chance that an unexpected event may occur or that the price simply does not react the way you thought it would.
Or what if I did?
In this appropriate scenario, do you have a plan to secure your winnings or press your advantage?
Failing to plan is planning to fail, and this also applies to trade exits.
Emotions like fear and greed can get the best of you in the heat of battle, so it’s best to have clearly defined exit strategies like these:
1. Initial stop loss and profit target
Ah, the good basics. If you’re just starting out or if you’re a set-it-and-forget-it type of trader, it makes sense to plan your stops and goals from the start.
This way, you can rest assured that you will be out of the trade should the price reach your invalidation point or that your winnings will be booked if it goes your way.
Of course there are different ways of choosing stops and targets, and this depends on factors like trade setup or ideal return on risk.
Some traders choose to keep an open profit target rather than placing a limit order, and that is perfectly fine. What you should not forget is to set the stop loss!
2. Trailing stop
Let’s say the price is going your way, and you want to stay in the trade while protecting your profits and beating out the market noise at the same time.
Trailing stop loss can be very useful in this situation. These are stop orders that are adjusted in your favor to secure more profits.
The basic rule of thumb for a trailing stop is to move these in the direction of the price movement And not far from it.
In other words, you should not use trailing stops to widen your loss in the event that the price moves against your trade.
3. Dynamic profit targets
As mentioned briefly earlier, some traders also adjust their profit targets in order to maximize profits.
This can be used in conjunction with stop-losses which can reduce risk while also leaving the door open for more potential gains.
For example, if you see a currency pair breaking one support level after another, you can continue to adjust your profit target lower in order to take advantage of the continued momentum.
It is also useful for more advanced trading strategies that involve adding to your position but, as always, do not forget to practice proper risk management.
You don’t want to lose everything (and more) in case the market suddenly turns against you!
4. Stopped time
Have you ever noticed if you keep a trade open it feels like forever and the price isn’t really going anywhere?
It might be time to just get out there and allocate your trading capital to a better trading setup!
You may miss out on a lot of profitable opportunities when you are locked into a slow position when the market is consolidating.
As with other types of stops, this also depends on your trading style. Day traders often set time stops to exit all trades at the end of the session. Some decide to close all positions before the weekend in case of gaps.
5. Exit the market
Finally, there is always the option to exit your positions in the market when conditions change.
Trade entries are often based on a certain set of premises – whether fundamental or technical in nature – so it is reasonable to exit when these are no longer valid.
Note, however, that this approach is subjective and requires active monitoring of market conditions.
You don’t have to stick to just one type of exit strategy per setup, and you don’t have to use all five either.
At the end of the day, it helps to remember that there is no perfect exit, just as there is no point in obsessing over the perfect entry.
Instead, remind yourself to go for an exit strategy that works with the rest of your setup and only learn from the “better exits” as you review your trades.