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To exit or not to exit, that is the question

Thursday, 17 September 2009 12:42

One item I find that is troublesome for my students is knowing when to exit out of a position on both profitable or loss positions. I strongly believe in the adage that if you use good entry points, the exits will take care of themselves, but I find that many of my students and traders that I know, will often get stopped out just before the big run in a stock.

On our daily webinars we talk often about the difference between a shakeout and a real move. A shakeout is a move designed to get traders to exit their positions with the appearance that a large move is coming and in the wrong direction, so traders think that they will be super smart here and exit before it hits their stop and save a few dollars and some added pain.

I do not think that I need to tell you how this ends, but if you are new to trading or the best trader in the world and have never seen this happen, 9 out of 10 times the stock moves back in the desired direction and now you get the added benefit of feeling like an ass on top of losing money. The next time this happens, the stock moves through your stop, but with your new added knowledge from the previous trade, you decide to let this go feeling that it will come right back like the last time.

Only this time, it was a real move and not a shakeout move. There are few ways to combat this dilemma:

Learn to tell the difference between a shakeout pattern and a real breakout: Tape reading is extremely helpful in this endeavor as you need to be able to tell if the stock you are trading has broken out of a certain range. If it has, then it is probably a real move.
Use volume to strengthen your conviction: If the volume is heavy and the stock is moving against you, then again be careful. If the volume is lower than usual, take your time getting out, maybe exit a portion of your position.
Adhere to your stops and you will not second guess yourself: Once you violate a rule that you have put in place, you open up the possibility for terrible things to happen. If you set a stop, stick to it and it will save you a lot of pain in the long run.
Use as much data for support or resistance that you can: My methodology is designed to give you more than one indicator, use as much information as the chart will give you. If the stock breaks the 200 day moving against you, be very careful.

All traders have sold the bottom and bought the top, it is part of this business, but if you make a habit of it, you won't be around long. Set up your strategies and your plans and be prepared to exit properly.

To learn more, contact me personally for a free 15 minute consultation.