Effective Strategies To Exit A Trade

The market doesn't always work in your favor, as we have always stated or as you may have discovered via personal experience. Even if you've done all the fundamental and technical analysis, there is still a potential that an unanticipated event may occur or that the price will not respond as you had anticipated.
Therefore, you must remember to prepare your exit strategies even as you put a lot of time and work into choosing your trade entries. A well-timed and precisely performed entry is useless if you cannot limit losses or increase profits.
With time-tested strategies that can increase profitability, we can correct this omission, and that's what we'll be looking at in this article.

Importance Of Having An Exit Strategy

1.  An exit strategy or plan allows you as a trader to reduce losses if a trade is unsuccessful. With an exit strategy, a trader can minimize or liquidate his market exposure while still making a sizable profit if the transaction is successful.

2. An exit strategy can help you lower your risk while leaving room for additional potential gain.

3. An exit strategy could help you direct your trading capital to a more advantageous trading setting if your motive for trading changes as you proceed.

4. Lastly, Being stuck in a passive position while the market is only stabilizing could result in you passing up opportunities that would be considerably more lucrative. Therefore, having an exit plan at that point helps you make the right decision.

Best Exit Strategy In A Trade

The most straightforward exit there is this one. Once a set amount of time has passed, whether minutes, days, months, or n bars, you exit. Even though it's straightforward, a time-based exit is among the best ones you may employ.
This strategy calls for discipline since certain positions do so well and may appeal that you desire to keep them past the period allotted. Taking your exit within bounds increases confidence, profitability, and trading skill. You can stretch and compress a holding period to account for market conditions.

2. Stop-Loss Strategy:

Avoiding the risk of financial ruin when trading is one of the goals of a stop-loss strategy. Stop-loss orders allow you to sell stocks automatically at a specific price or moment.
The stop-loss will instantly change into a market order to sell when this point is reached. If the market moves swiftly against you, these can be useful in limiting losses.

3. Trailing Stop: 

A trailing stop is set at a predefined distance from the asset's market price, either in terms of percentage or monetary value. The trailing stop moves automatically with the price as it changes, but when the price is static, the stop-loss price stays at the most recent level.
As long as the price advances positively, this order is intended to collect profit and cap losses by exiting a trade. If the price moves against your trade, you shouldn't use trailing stops to increase your tolerance for loss

4. Profit Target:

This is a predetermined price where the trader takes profits and exits the trade/position. Unlike stop-loss, a profit target is a price at which you have decided to exit a trade "profitably."
To increase profits, some traders sometimes modify their profit targets. This can be used with trailing stops to lower your risk while creating more gains opportunities.

Before Choosing An Exit Strategy

Two factors must be considered before developing an exit strategy. They include:

1. Duration Of Trade:

Your exit plan would be greatly influenced by how long or short your trading period would be. It all depends on the type of trader you are.
If you trade for the long term or are a long-term trader, your exit strategy must be based on long-term-oriented fundamentals. For short-term trading, the opposite is true.

2. Risk Tolerance:

When investing, risk tolerance is a crucial consideration. You establish risk tolerance by determining how much you can afford to lose.
The length of your trade and the kind of stop-loss you'll employ will depend on this. Less risk-seeking people typically establish tighter stops, whereas risk-takers offer more generous downward room.

Conclusion

There are no perfect strategies or strict guidelines for when to leave a trade, as there are with most things in trading. Most traders devote less effort to exits than entries, even though the exit is just as significant and demands the same level of care as the entry.