Exiting a a trade is probably more important for a day trader than how he or she enters them. A highly effective and accurate entry strategy could be pointless if the exit strategy being used does not maximize profits.
Although much effort is being discussed on a proper entry of a trade is crucial for profits, knowing and having an exit strategy is just as important.
Your Profits can be limited to the following:
Following a trading Plan: Ability to follow through on a trading plan using discipline on when to exit.
Limitations on a short Time Frame: Trading in a short period such as a day lowers your flexibility on exiting trades and decreased profit potential.
Position Size: Your success can be enhanced or limited by the size of your position
Markets: Some Stocks are more conducive to day trading profits than others.
Whats great about having a shorter time position is that the results of the trades will be known by the end of the day. Because of this, feedback is immediate and it enhances learning.
Some traders will carry losing trades beyond their exit points and beyond the end of the trading day because their inability to accept a loss. You should never carry a losing position over a day especially if it isn’t part of your trading plan.
- Profit Targets: Take profits at targets generated by your trading methodology. Do not take profits based on a guess. You will limit your profits and it will be hard to identify if your trading is successful.
- Break Even Target: Determine a profit target that when met, your cue will be to place a stop loss at break even. This will allow you to remove most of the risk from your trade while also allowing you to hold the position. If you are not stopped out, then you can exit at the end of the session.
- This gives you an opportunity to either get stopped out, or take a bigger profit.
- Second Profit Target: Once a profit target has been met, you can implement a trailing stop in which you can maximize your profit. Once set you can literally walk away from the computer knowing that at the end of the day you will have made money.
- Half-Position Closeout: Take profits on half o your position at the profit target.
- Plas a stop loss on the remainder of the position. This will remove most of the risk from your trade while allowing you to hold the second position. If you are not stopped out, then you exit at the end of the day. The risk is that you can be stopped out repeatedly at break even on the second position
- Trailing Stop for the second position so that you can still be stopped out break even and maximize your profit.
- Third-Position Closeout: Take profits on a third of your position at the profit target. Set a second profit target, and trailing stop for your third. Always have a stop loss at breakeven. If you get stopped out you may not have a large profit size but you have more of your position size that can generate a larger profit if the trade goes in your way.
Trailing Stop Strategies
A trailing stop is the use of a buy stop or a sell stop to lick in a percentage of your profits. Trailing stops move along with your profits.
For example you have a 10 cent trailing stop on a stock that moved from $5 to $7. As soon as the stock retraces 10 cents you are automatically trigger an order to exit the position to lock in the profit.
With time and experience you will determine your own best exit strategies. Before implementing it is always important to Paper Trade with your strategy so that you are comfortable setting up your Order Types to accommodate your exit strategy.