“When do I exit??”
This is one of the most common questions traders have – and one of the most important. There is a fine line between being a “bag holder” and correctly waiting for the stock to continue its’ trend.
I always encourage people to choose stocks with a strong daily chart as this gives you a lot more flexibility with your trades. If a stock turns against you but their daily chart is very strong (or very weak if you are shorting) than you have the ability to hold it overnight with a higher probability of success.
Still, that doesn’t answer the question of – when do you get out of a trade, whether in profit or in loss?
So here are ten reasons (simply because people love lists of 10) – in no particular order:
1) You want to – simple as that. You made profit and you are happy with that. Or you have a loss, it still has a decent chance to come around but you are sick of looking at it. The issue is Why do you want to exit? Is it because you are down too much money? Well that means your position size was most likely too big. Is it because it is taking too long? That usually means you are too impatient. Still, this is a reason we all have used, so it belongs on the list.
2) Sell into Strength – there are many traders that buy into strength and sell into strength – they don’t wait for the reversal, and while they may miss some gains, they never miss taking profit. Stock is strong, you are in profit, it is continuing to give you gains – selling into strength is a perfectly legitimate reason to exit a trade. I would suggest that you start off by only closing part of the position first, and then let the rest ride.
3) You need the buying power. Trades take up resources, and you need those resources. If your money is tied up in a trade and it is not doing what you expected, perhaps not losing but still not giving you the gains you want – your money may be better spent elsewhere. However, once again if this is a common problem you are probably trading with too large of a position.
4) Thesis no longer applies. Maybe you entered the trade because the stock was strong against SPY and now it no longer is, or you entered due to heavy volume and that has dried up, maybe you were playing the 3/8 cross and the 8 crossed back below the 3 – all of these are good reasons to exit. If the reason you entered no longer exists this is one of the single biggest indications you should exit a trade.
5) Major Technical Violation – This is a no-brainer – if the stock broke through support, fell below a major SMA, etc. in other words it reversed – a stock that was bullish is now bearish or visa-versa. Do not fool yourself into thinking that the stock can recover. If there is a technical violation and it holds, you should exit the trade. These violations are usually seen on the daily chart, not the intraday chart.
6) Target Acquired – you put in a profit target and the trade hit that number. Do not get greedy, take the profit and move on.
7) Scratch – the trade was a loser and now you are happy to just break-even, the trade hasn’t gone anywhere and you had a time-stop in your head, so you scratch it (i.e. breakeven). Psychologically people hate scratching trades, it is like watching a sports game and it ends in a tie. Feels like a waste of time. But breakeven is a hell of a lot better than losing.
8) Market changes – maybe you shorted a stock in a weak market, and even though the stock is Relatively Weak when the market starts going up that doesn’t mean the stock will stay down, it just means it won’t go up as fast as other stocks might. It is hard to short in a strong market and hard to go long in a weak one. Always always always always keep an eye on the market. If market conditions change and it is impacting your trade, you need to take that into account. Note – this doesn’t mean a small market drop or bounce, I am talking about a situation where SPY gapped up, was strong for most the morning, you went long on several stocks and then mid-day SPY begins to drop – eventually going red. That is when you need to start reducing your long exposure (as an example).
9) Earnings or an event is coming up – you do not want to hold the trade over an event as it is unpredictable.
10) Price Action – It is no longer what it was when you entered. This applies mainly to momentum trading and you are noticing bigger volume spike on red bars than on green ones, or the stock compressed and has now broken to the downside. Perhaps the stock fell below VWAP and the daily chart isn’t strong enough to justify holding through the current drop. These aren’t technical violations, but if you entered based on the price action you were seeing, and it no longer fits your thesis, you should exit.