Considering the possibility of asset purchase, at the same time, consider the opportunity to sell it. It is impossible to concentrate only on the trade entry, it is important to leave the transaction timely. Exit strategies represent an important component of a risk management. They are urged to protect your trading account and to limit losses. Besides, an exit strategy is important for profit protection in the transaction which will fill up your trading capital and can be used in further transactions. Irrespective of whether you want to protect a profit or to limit losses, an exit strategy should determine accurately when and how to close a transaction.
Many traders, formulating the exit strategy, use a combination of various tools and means of the analysis. At the expense of it, they try to find that level at which their transaction should be liquidated. Implementation of exit in the planned point - a trick and modern technologies. For example, the trader can use the means of the technical analysis to determine the target objective of which will sell the asset at the same time uses the stop order to close a transaction if the price is developed. It is important to remember that there is no guarantee that the stop order will be performed at the set price or even close to it.
Anyway, if you want used tools and technologies to work, it is necessary to develop the general philosophy at first. Some traders prefer analytical approach. Others - practical. Some are ready to accept significant risks. As each trader is individual, and approaches are different. We will consider three popular exit strategies.
Zones of Support and Resistance
A decent exit strategy can be created, using the technical analysis and the graphical software to build trend lines based on the historical prices. Possessing this information, the trader can reveal zones of support and resistance where it is possible to look for potential points of entry and exit from transactions. Figuratively, such zones can be compared to a floor and a ceiling of the room.
The zone of resistance is a zone where the asset price can repeatedly come, but not punch it and not to come to new High. The asset which reaches a resistance zone can be consolidated with it for longer periods if momentum it is not sufficient to push the price through this zone. If the price punches resistance zone, the new bull trend can begin, and the zone of resistance will become a support zone.
The zone of support is a zone to which the price can repeatedly roll away, but not pass below. The zone of support can serve as an obstacle in a way to new Low, will not appear sufficient yet momentum which will be able to press the asset through this zone. If the share punches a zone of support and falls below it, the new bear trend can begin, and support will turn into resistance.
Let the Profit Grow
Another exit strategy is to allow the profit to grow and to cut losses quickly. It can contradict the instinctive desire of many traders to leave the transaction which has sharply grown in price. Such traders consider that time is profit, it needs to be taken away until the price developed against them. Similarly, many traders do not hurry to leave unprofitable transactions in hope that the price will return to their party. It is quite logical: people like to get profit and do not like to incur losses. Therefore, they hasty leave profitable transactions, so far the price was not developed, and remain for too long in unprofitable, hoping for a miracle.
Of course, not each rally comes to the end with a sharp collapse. Some assets continue to move ahead surely above. You also know that many assets after a fall are not recovered anymore (often they continue to fall) so you should not hope for it. That is why it makes sense to consider the approach, contrary to the aforesaid: it is necessary to allow the profitable transaction to grow and to cut off losses quickly. This strategy is constructed on the idea that the position should be held until it continues to go forward, and it is necessary to sell it, only when it falls.
But assets grow and fall throughout the day. Whether it means what needs to be sold on the first downtick? How to determine when is the most suitable time for an exit? It is possible to answer so: it is impossible to work in a random way. This algorithm should be determined by your personal tolerance to risk. Many traders prefer to keep the risk in each separate transaction within 1-3% of the total amount of the trading capital. In the case of this method, traders calculate the risk in dollar expression and then determine how far their transaction should fall that the risk has reached this limit. Based on such calculations, they tighten the stop in the process of promotion of the price up. It is possible to do it manually or using the “watching” stop. So, if the trader has taken the asset for $10, and his risk constitutes $1 then watching stop will be established at the level of $9. If the price grows to $15, then stop will be tightened to the level of $14.
Having determined the admissible risk and using the watching stop, you can limit potential losses to the “acceptable” amount. Moreover, it will help you to give the profit the chance to grow.
Take a Part of Profit
The old saying stating: “It is impossible to go into bankruptcy, taking the profit away”. But it is necessary to remember that it is not obligatory to take all profit. It is possible to apply scaling of transactions. If you believe that the price approaches the top, but there is a probability that it will go further away, partially leave a transaction, having taken away a part of the profit.
Let's say you hold a transaction from 1000 assets. It is possible to sell only 200 assets, and so far to leave the rest. Systemically applying partial sale and buy-in assets, you can improve the productivity of the trade. In this case, if you pass price peak, then you will remain with profit anyway.
This strategy can be especially effective in a flat and in the low-volatile market. Let's say you have entered a transaction, believing that the asset will grow to the level which it did not reach earlier. However, it can turn out that the price moves without obvious trend. Dumping transaction parts, you can not only take away small profits, but also take two more benefits:
1) To keep some part of an initial position in case the market will go up again;
2) To reinvest the released resources in other transactions which promise more opportunities.
An exit strategy can be based both on profit fixing and on risk management. These strategies are applicable during the periods of both low, and high volatility in the market. In the case of exit strategy creation, there are many options of profit protection or restriction of risks. The task of a formulation and execution of such strategy unites philosophy, technologies, and technical tools. Therefore, a good trading platform considerably will simplify the process of creation and exit strategy implementation. And the philosophical party of this question depends only on the trader.