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Four Exit Strategies You Need For Every Trade

After you’ve entered a trade, figuring out the right time to exit can be challenging.

You don’t want to leave money on the table…
You don’t want to ’round trip’ a trade and see a nice gain turn into a loss…
And you definitely don’t want to take a BIG loss!

I used to get extremely frustrated with all of this.

I’ve experienced both extremes.

I was once the guy who’d be shaken out of trades by a few cents to then watch them go on a tear without me.

I was also the guy who’d overcompensate and hold on way too long… Watching a 20% gain turn into a 14% gain…then an 11%, then thinking it would rebound and eventually exiting with maybe 6% if I was lucky.

Has this ever happened to you?

Out of frustration, I decided I needed not one, not two, not three…but four ways to exit every trade. I never wanted to be caught like a dear in the headlights again!

Then I had another idea… What if I started to think of each trade like a movie?

I don’t know about you, but if a movie is bad enough, I’ll walk out on it.

Just like a bad trade, those doors where we entered are right behind us. Worst case, we can get up and leave. That’s our ‘stop loss’.

But theaters also have multiple exits.  Our trades should have them too. It turns out that there’s many reasons to exit a trade. Maybe the trade is great and goes on a huge run, but now its in nose bleed territory. Time to sell at least something…

Or what if it hasn’t moved in a long time. As they say ‘time is money’ and that trade that is going nowhere fast is tying up capital that could be in a trade that’s moving.

Or maybe a trade has made some profits and we want to lock some of those profits in. We can have a plan that says that “if price falls below X, sell _number of shares.”

Here are the 4 exit strategies you need for every trade.

I also find it helpful to think of the first 3 strategies as ways I’m going to get paid. The 4th strategy is a cost of doing business and a way of keeping that cost small!

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Plan A: Profit Target(s).

The trade works out well and does exactly what you wanted it to do. Hurray! Knowing where you’re going to allow the market to pay you and how much is important! If not, you run the risk of watching your gains evaporate.

What I like to do is when price hits my target, I’ll sell half. That way no matter what happens after that point, I’m a winner! (shout out to Mark Minervini , my friend, mentor, and Foreword Author on The Trading Mindwheel, for this idea). If price keeps running, then thank goodness I held onto half! If price moves against me after hitting my target, then thank goodness I sold half! Keeping a positive mindset (preserving our mental capital) is just as important as preserving physical capital.

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Plan B: Trailing Stop(s).

Trailing stops can get you out of trades that aren’t moving fast enough. If for example your trade becomes sluggish and isn’t maintaining enough momentum to keep above a certain moving averages, a trailing stop can get you out. 

The key to a good trailing stop is to customize it to your personal style. My trading style is momentum based swing trading. That means most of my winning trades are held for a few weeks to a few months. As such, I only want to be in the strongest names while they’re running higher. The trailing stops I use are a series of “Danger Signals” that tell me “Hey, momentum is fading. Time to cut this loose.”

Danger Signals are covered extensively in The Trading Mindwheel. We also worked with Brandon Shapiro to bring a Danger Signals indicator to life in Trading View. To get us started, here’s a dozen that I’ll look for. When I see any combo of 7 or more of these, it will prompt me to exit completely, or aggressively raise my back stop.

  1. Price closes near daily low
  2. Price closes below the 10ema
  3. Price closes below a short term swing low
  4. Price closes below a 10 day 1.5 ATR
  5. Price has made 3 consecutive days of lower lows
  6. Any down day that closes lower than previous 3 bars
  7. Fast stochastic crosses below the slow stochastic
  8. Both fast and slow stochastic are curved down
  9. Outside reversal bar that pushes into fresh highs and closes near its lows
  10. Relative Strength Line (RS Line) curving down
  11. RS line negative short term
  12. RS line underperforming price short term

Here’s how this worked on ECPG. I had entered on July 12 and on August 2nd, 8 danger signals showed up… 2 days before price completely imploded!

Plan C: Back Stop(s).

Once the trade is moving in your favor, it should start to make new areas of price support. When it does, price should not fall back below it.

So, what is ‘support’?

Think of ‘support’ like this. You enter a building and walk up a flight of stairs. Now you’re on the 2nd floor. The new floor you’re standing on is support! It is supporting you and it SHOULD be sturdy! If it starts to break as you walk around, you’d want to get the heck out of there before you fall through it and get seriously injured! This same principle applies in trading. 

New areas of price can come in a few ways. Here are two of my personal favorites:

  1. Price starts to move sideways for a few weeks while not making any significant new price lows.
  2. There is a large breakaway gap up on huge volume.

When either of these scenarios happen, if price starts to fall through ‘support’, I’ll exit some, if not all of the trade.

Here’s a recent trade in NINE. It was entered on December 20. See how the prior chart highs (ceiling) are now acting as the floor (support).⠀

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Plan D: Stop Loss(es).

While we’d all love for every trade to be a winner, that’s just not how it works. This is why stop losses are important. Our only protection against a BIG loss, is by taking a small loss.

A friend of mine learned this lesson the hard way…

It was 2008. Stocks were imploding. Financial institutions were collapsing. And the government was rushing in to provide bail outs. One of the companies that to get bailed out was Citi Group.

I was naïve back then. My friend and I thought “too big to fail” was a great reason to buy shares in Citi. We both bought in at about $10/share. Within a few days it was up to $11 and we were thrilled! Drinks all around!

…But then, price started to move against us. Within a week, price was back at $10 and then dropped further to $9.

Even though cutting losses was still a new idea that I was still warming up to back then, I grit my teeth and cut the loss. Losing 10% wasn’t fun, but it was better than what was about to happen next.

Price continued to drop from there. From $9, down to 8, 7, 6. and all the way down to about $5/share!

I was long gone but unfortunately my friend held on and was down 50% within a few months!

It’s on us to decide at what point we’ll cut a loss short. The best time to figure this out is BEFORE the trade is executed. Its all too easy to say “Meh, lets give it a little more room” and rationalize holding on to losses. 

Or worse… Thoughts of “Hey, the market is throwing a sale! If we liked it at $10, buying more at $7 is a bargain!”  This is the exact opposite of what you should be doing.

Think of the math… If you lose -10% on a trade, it takes 11% to get back to even. Not too bad. One winning trade and you’re right back on the horse.

But if you lose -50% on a trade, it takes 100% just to get back to even!

Let’s sum it up…

  • Having an exit strategy is crucial for achieving trading success.
  • The four exit strategies you need for every trade are:
    • Profit Targets
    • Trailing Stops
    • Back Stops
    • Stop Loss(es)
  • Once the trade is moving in your favor, it should start to make new areas of price support. When it does, price should not fall back below it.
  • Stop-loss prices and profit targets should be decided BEFORE the trade is ever placed.

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