Money management is one of the most important (and least understood) aspects of trading. Many traders, for example, enter into a trade without any sort of exit strategy and are often more likely to make premature profits or, even worse, suffer losses. Traders must understand what exits are available to them and attempt to create an exit strategy that will help minimize losses and lock in profits.

How to exit a transaction

There are only two ways to exit a trade: by taking a loss or making a gain. When we talk about exit strategies, we use the terms take profits And stop loss orders to refer to the type of exit performed. Sometimes these terms are abbreviated to “T/P” and “S/L” by marketers.

Stop-loss orders (S/L)

Stop losses, or stops, are orders you can place with your broker to automatically close a position at a certain point or price. When this point is reached, the stop-loss will immediately be converted into a market order. These can be helpful in minimizing losses if the market moves quickly against you.

Several rules apply to all stop-loss orders:

• Stop losses are always set above the current asking price on a purchase, or below the current price offered for sale.
• Nasdaq Stop-losses become a market order once the stock is listed at the stop-loss price.
• AMEX And New York Stock Exchange Stop losses allow you to have rights to the next sale in the market when the price is trading at the stop price.

There are three types of stop-loss orders:

1. Good until canceled (GTC) – This order type is valid until an execution occurs or until you manually cancel the order.
2. Agenda – The stop-loss expires after one trading day.
3. Trailing stop – This stop-loss follows at a determined distance from the market price.

Take-Profit Orders (T/P)

Take profits, or limit ordersare identical to stop-losses in that they are converted into market orders to close a position when a point is reached. Additionally, take-profit points follow the same rules as stop-loss points in terms of execution on the NYSE, Nasdaq and AMEX exchanges.

However, there are two differences:

1. There is no “end” point. (Otherwise you will never be able to make a profit!)
2. THE exit point must be for profit. (Below the market price for a short trade and above the price for a long trade.)

Develop an exit strategy

There are three things to consider when develop an exit strategy.

1. How long do I plan to do this job?

The answer to this question depends on the type of trader you are. If you are in it for the long term (for more than a month), then you should focus on the following:

• Setting profit targets be reached in several years, which will limit the number of your transactions.
• Develop trailing stop-loss points that allow you to lock in profits from time to time in order to limit your downside potential. Remember that the primary goal of long-term investors is often to preserve capital.
• Take profits in stages over a period of time to reduce volatility by liquidating.
• Allow volatility so you keep your trading to a minimum.
• Create exit strategies based on fundamental factors oriented towards the long term.

If, however, you are making a short-term trade, you should be concerned about these things:

• Set short-term profit goals that execute at opportune times to maximize profits. Here are some common execution points: pivot point levels, Fibonacci/Gann levels, trend line breaks and any other technical points.
• Develop strong stop-loss points that immediately eliminate stocks that aren’t performing.
• Create exit strategies based on technical or fundamental factors affecting the short term.

2. How much risk am I willing to take?

Risk is an important factor when investing. When determining your risk levelyou determine how much you can afford to lose. This will determine the length of your trade and the type of stop-loss you use. Those who want less risk tend to set tighter stop orders, and those who assume more risk allow more generous downside margin.

Another important thing to do is to set your stop-loss points so that they are not triggered by normal market volatility. This can be done in several ways.

THE beta The indicator can give you a good idea of ​​how volatile the stock is compared to the broader market. If this number is between zero and two, you will probably be safer with a stop-loss point about 10-20% lower than where you bought. However, if the stock has a beta greater than three, you might consider setting a lower stop-loss or finding an important level to fall back on (such as a 52-week low, moving average or another important point).

3. Where do I want to hang out?

Why, you may ask, would you want to set a take profit or exit pointwhere do you sell when your stock is doing well? Well, a lot of people get irrationally attached to their assets and hold these stocks when the underlying fundamentals of the trade have changed. On the other hand, traders sometimes get worried and sell their securities even if the underlying fundamentals do not change. Both of these situations can lead to losses and missed profit opportunities. Setting a point at which you will sell takes all the emotion out of trading.

The exit point itself must be set at a critical point price level. For long-term investors, this often happens at a fundamental milestone, such as the company’s annual goal. For short-term investors, this is often set at technical points, like certain Fibonacci levels, pivot points or other similar points.

Put it into action

It is best to enter exit points immediately after the main transaction.

Traders can enter their exit points in two ways:

1. Most brokers trading platforms have the functionality to enter commands. Alternatively, many brokers allow you to call them to place entry points with them. There is one exception, however: many brokers do not support trailing stops. Therefore, you may need to recalculate and change your stop-loss at certain time intervals (for example, every week or month).
2. Those who do not have the functionality to enter commands can use a different technique. Limit orders are also executed at certain price levels. By placing a limit order to sell the same number of shares you own, you are effectively placing a stop-loss or take-profit point (because the two positions will cancel each other out).

The essentials

Exit strategies and other financial management techniques can greatly improve your trading by eliminating emotions and reducing risk. Before you enter into a trade, consider the three questions listed above and set a point at which you will sell at a loss and a point at which you will sell at a gain.