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How to Exit a Trade

I use two exit strategies here at Trader's Advantage: target prices and stop losses.

The best time to decide when to get out of a trade is when you get into it. As you enter a trade, you'll set a target price to lock in gains and a stop loss to minimize losses. I will give you the specific details for each trade in my daily updates and trade alerts, and that information also will be on the Buy List.

This disciplined approach to selling is one that many individual investors lack, and it often costs them dearly. They tend to hang on too long and give back gains in a stock that has moved up, or they hope against hope that a damaged stock will turn around. But here at Trader's Advantage, we'll use targets and stops to make sure that doesn't happen to us.

I have different rules for executing targets and stops, so please read carefully to learn exactly what you need to do to implement my exit instructions.

Targets

With each trade I recommend to you, I will provide a target price. Usually, I'll note the target price in my initial recommendation. If not, I'll update you with that price information as soon as possible. You always can check the Buy List on my website, where you can see all the information on each trade at a glance.

For each trade, I recommend that you set a limit order with your broker to sell either all or a portion of your shares at the target price. I will tell you how much to set up to sell, such as a quarter, third, half or all. When I use the term "initial target," that means I recommend that you sell the designated portion (per my trade instructions) of your shares at that price and hold the rest for my second, third and/or final target. I'll specify whether the target price is my initial, next or final target in my daily issues and trades updates, and you always can refer to the "Comments" section of the Buy List for more information.

Let's say that I recommend a position in X stock or option, and I tell you that I want you to set an initial target of $X, at which point you should sell a third of your position. That means you should buy shares (or options contracts, if it's an options trade) in multiples of three. In other words, you should buy 30, 60 or 90 shares, or 3, 6 or 9 options contracts -- or more, in proportion -- depending on your available funds for investing. Please always be mindful of your total trading account, and allocate your positions evenly across your portfolio.

Let's say you bought 600 shares of X stock because I told you I want you to close the position in thirds. In your online brokerage account, you'll set up to sell 200 shares (that's one third of your position) for profit at my initial target price. When the target hits and a third of your position closes, I'll give you the next target. When the next target price hits, you'll sell another 200 shares (the second third) for profit. Then I'll give you our final target price, and when it gets there, you'll sell your last 200 shares (the final third) for profit.

As for the timing of the exits at target, set these up to be good at any time of the day. When the price spikes upward in our favor amid any volatile, we want to capture that gain!

In recent market conditions, we've been employing initial targets across the board, locking in gains by selling a portion of our position at the first target and then letting the rest ride for additional gains if the trade continues to play out as we expect. So for now, you generally can plan to sell a portion (usually either a third or a half, depending on my instructions) when our initial target is reached.

Stops

The flip side of a target price is a stop loss, the point at which a trade becomes less likely to succeed and is susceptible to further downside. I recommend that you set a limit order with your broker to sell all of your shares if our stop is hit.

Some stops are meant to minimize losses, while other stops are meant to lock in gains. If the current price has exceeded our entry price, or if we've closed a partial position at profit, I'll raise the stop price to make sure that the remainder of our position will be a winner. One of my rules is to never take a loss on a position in which you have had at least a 5% gain.

Please read carefully to determine what parameters you need to specify when setting your stop orders.

I use two types of stop-losses: Good-till-canceled (aka anytime) stops and end-of-day stops.

A good-till-canceled stop means that you should sell all of your shares if the trade hits my stop price at any time of the day.

An end-of-day stop means you should set your stop to be active only during the last 15 minutes that the market is open (i.e., between 3:45 and 4 p.m. ET). If the trade hits my stop price during that brief period, you should sell all of your shares then.

Let's use the same example from above: If I recommend a position in X stock and tell you that I want you to set an initial target of $X, at which point you'd sell a third of your position, then you should buy shares (or options contracts) in multiples of threes. I'll also give you a stop price (specified as either good-till-canceled or end-of-day), meaning that you should set up to sell all of your shares at that price using the time parameters of the specified stop.

The type of stop I tell you to set up is extremely important, and you need to follow these guidelines explicitly.

Good-till-canceled stop: Let's say you bought 600 shares of X stock, and my latest advice was to use a good-till-canceled stop at $X. In your online brokerage account, you'll set up to sell all of your shares if the price dips to my good-till-canceled stop price at any time during the trading session.

End-of-day stop: Let's say you bought 600 shares of X stock, and my latest advice was to use an end-of-day stop at $X. In your online brokerage account, you'll set up to sell all of your shares if the price dips to my end-of-day stop price at any point between 3:45 and 4 p.m. ET. End-of-day stops shouldn't trigger before 3:45 p.m. ET, unless otherwise specified.

You can call your current online trading broker's customer service department to see if they support the timed-order function. If your platform doesn't, I suggest you look into using interactivebrokers.com, which lets you place a timed trade order in which you can specify the time window for a trade -- down to the tenth of a second.

Everybody would love to find the perfect stop-loss system, of course, and there have been lots of books written about how to set stops. But there is no perfect system. My goal is always to set stops far enough away from the current price so that we don't get stopped out on normal volatility and also close enough that we minimize our losses if a major change in direction should occur.

To recap, here's what to do when you set up a trade or when you make adjustments, per my instructions:

"Initial target" means set up to sell the specified amount at that price. This can take effect any time of the day.

"Next target" means set up to sell the specified amount at that price. This can take effect any time of the day.

"Final target" means set up to sell the specified amount at that price. This can take effect any time of the day.

"Good-till-canceled stop" means set up to sell all of the position at that price if the stop price is triggered at any time during the trading session, unless otherwise specified.

"End-of-day stop" means set up to sell all of the position at that price only if the stop price is triggered after 3:45 p.m. ET, unless otherwise specified.

To read about how to enter a trade, click here.

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