Determining Trade Exits
There are numerous factors that can determine when to exit a trade. Since so many factors can affect the reasoning for exiting, it would benefit traders greatly to already have an exit strategy in place before even venturing into a trade. Factors will include how aggressive or how conservative we are as traders. Are we taking a gamble or are we taking a thought out safe approach? Are we looking at this as a short term or long term trade? Are we trading the stock or are we trading the option?
When trading options, we have to consider the effect of time decay on our option. We also have to consider how implied volatility will affect our trade. No matter what we are trading, we have to have a reason to exit. We might have a price target in mind based on a support or resistance level being reached. We could have a price target based on a pattern that was confirmed. We may decide that we will let a trade run as long as a trend is intact. (The question then arises as to how we determine when the trend is no longer intact.)
Not only do we plan an exit based on reaching our goal, but also for trades that do not pan out. At what point do we say enough is enough and exit the trade that is losing money? If we already know what it is we are looking for, then we do not have to question when to exit a trade. It is difficult to eliminate emotions from trading, but the more we prepare ourselves for an exit, the better our execution will be.
No comments yet.