Tuesday, May 31, 2011

Exit Strategy

Most people know how to buy, but do not know how to sell. Exits are important because your exit strategy will determine:
  • Size of your profits
  • Size of your losses
  • Length of your trades
  • Amount of your risk
  • Size of your position
  • Your percentage of winners
  • Your total return
For most traders exits are more difficult than entries. Why are exits difficult?
  • We have unrealistic expectations
  • We expect to sell at tops
  • We tend to apply too much hindsight
  • We sense lack of control
  • We can enter trades on our own terms
  • We must exit trades on terms set by the market
Solution: We need to have realistic expectations and take control of our exits. Sometimes the stock price immediately drop after we have bought it, accept the fact that we have bought it in the wrong time. Do not turn your short term investment into a long term investment.
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