Exiting a Trade

There are basically 2 reason for a trader to exit a trade:

1. To take profits
2. To cut loss

Both are important (especially #2).  For simplicity, I will explain in the context of a Long trade (ie, buy with the expectations that the stock will rise) for a trader.

Why is cutting loss important?

Cutting loss is part and parcel of the game.  When to cut loss will depend on our trading time horizon and the strategies we employ.  

For many inexperienced traders, taking profits is the easy part.  Cutting a loss is very difficult and often never done (they prefer to wait, pray, and hope for the trade to at least come back to break even).  

Sometimes a stock could simply be acting badly due to some fundamental issues; or the bull run could have ended.  Whatever the reason that the stock acted badly, traders who do not practise loss cutting may end up becoming a "long term investor" holding a lot of stocks with no chance of breaking even in the foreseeable future. The (paper) loss could be so huge that it surpassed the profits they had made during the run up.  

The good news is, cutting a loss gets easier the more we practise it, though it may still hurt (ouch!) but once we cut we are able to move on to new opportunities.  Cutting loss enables us to focus on the good trades, rather than waste our time and energy fixated on the bad ones.  The aim is to have a good winning trade that will make up for several small losses, rather than having several small profits that are wiped out by one big loss.

Trading is about odds, good strategies ensure higher chance of profitable trades but without the right money management (right position sizing, favorable risk/reward ratio, and loss cutting), we may never be very profitable.


How and when to take profits?

The common strategies are:

1. Fixed Profit Target 
    - exiting based on chart pattern projections or based on overhead resistences

       some examples

2.  Trailing Stops
     exit the trade if a stock starts going below:
     - the last pivot low, or 
     - below a rising moving average, or 
     - below a rising trendline

     variations may include exiting when the stock retraces beyond a certain % from the recent high.