Quote from Brandonf:
While everyone's focus always seems to be on entry techniques experianced traders realize that your exit is the most important part of any trade (think of it this way, how much money have you lost on entries? Probably not any. How much have you lost on Exits?, possibly a lot, I know I have). So, while anyone can enter a trade, very few people know how to exit effectively.
Following are exit criteria for swing (1 to 5 day holds) trades. As with all things that deal with trading, there will be some exceptions to the rules. Use these rules as general guidlines for selling (understand the concept and they work great for your daytrades too)
Types of Exits:
A) The initial stop: This is your first potential exit area. It is like an insurance policy and no trade should be entered with out it. You always have to have a worst case stop that you will take no matter what. This is what you base your risk on and it keeps you in the game which is always the goal. Show up tomorrow, blowing stops, and that's the surest way to have to call the traders suicide hotline. Not fun. Don't do it. So, your first exit is the stop and you always have to have it. This worst case stop should be placed at a logical area of support, right under it. I'm assuming a long position for ease in the class, just know a short is reversed.
B) A break even stop.This will come into effect at various times depending on ththe price and volatility of a stock but a good rule of thumb is $1.50 to $2.00. At this point you should have a worst case scenario of break even. There will be variations of this obviously. So this will require a bit of thinking on your part, which is too bad, and that's not meant to offend anyone. That's just saying the best trading plans you wont have too think much. You just follow the plan. So it's too bad on this one part that you have to. At some point though you need to say: Ok, I am playing with the market's money. I am no longer at risk and the worst I can do is break even. It's very liberating and promotes free thought in a trade. If I could point to one of the things I do that make me successful, using break even stops would be in the top 3 or so. It's very important.
C) The trailing stop method. The saying "once a winner, always a winner" here. Usually this will be applied after the break even stop and what you need to do on this, again you have some room. There are two ways to do it: The first of which is to trail out under major intraday pivots. These could be from today or yesterday. A pivot is a bottoming area. As soon as those are better than your break even level, but not until. The next option, one which I use in a very well trending market but not really this one, is to simply trail out under the prior days low. This allows you to stay in the trade awhile and unless an sellable event occurs, which I will cover in a minute, then I would trail out in this manner.
Next I want to talk about taking partials. I'm a big fan of taking partials. It insures a trade is better than break even and it's saved my ass(ets) more than a few times. In most cases when a stock is up to my break even stop amount, this is when I will start to look for partials to be taken. So if I have 600 shares of XYZ at $60, when its up to $61.50 I will go ahead and sell 200 or 300 shares and then move my stop on the rest of the shares to break even. This will insure that, at worst, I take a gain. Not a bad way to play at all. It also allows you to be a little bit more liberal on the trailing stops, just from a psychological standpoint. It makes it easier to stay in for some long pulls. Hope I'm making some sense here and clearing up a lot of selling issues for you guys.
Ok, next I need to cover the sellable events. If a sellable event occurs, you will sell regardless of the stop being hit, even if your stop is not hit. If one of these sellable events occurs, you will say good bye to your trade.
1) The first sellable event is when a stock gaps up 2 1/2% or more at the open. The instant this happens you need to sell 1/2 of your remaining shares. Then, wait for a five minute low to be established and if it's broken, kill the rest of the trade. The reason here is that most gaps do in fact fail on a swing setup. So, you need to sell those gaps, On the gap there will be plenty of amateurs begging you to sell to them. Be nice. Give 'em what they want, you already have it at a better price. That's sellable event 1.
2) If in the last 30 minutes of the day a stock is at or near the days low, you need to sell. If the stock closes in the lower 1/3 of the day's range, that's usually not a good sign. That shows sellers became active and you are probably sitting on the wrong side of the market at this point.
3) If a stock you are in gaps down more than 1/2 point at the open, then breaks the low it establishes in the first 30 minutes of the day you need to get out, regardless of trailing stops.
4) If a stock is up a good deal all day, then it gets strong selling in the last hour or the day which force it to close under the day's opening price, that is a sign that bad things could be in store for the stock and you should get out.
5) If an exhaustion bar occurs. You all remember my trade in ENTU, Here is one of my major screw ups. On Friday we had a very large range day, on climax volume. When you see this, especially after a stock has already been up a few days, this signals a blow off and, more often than not, the next major move is down. When I got greedy with ENTU and did not take this signal it cost me about 1/3 of my account in a day.
6) The final sellable event would occur if there is climax volume but hardly any move. This is also a sign to us that the stock is liable to break down.
Brandon
