Saturday, October 27, 2007

Exit Strategies

After examining my trading activities over the past few years, I've come to the realization that my main downfall is the lack of an exit strategy in the event that I'm wrong in my analysis. I've been hesitant to place stop loss orders in the past since I suspect brokerages take advantage of such orders to grab 'cheap' shares. Nevertheless, stop losses can play an important role in limiting your downside.

I recently heard a trader say that you should have a minimum 2:1 reward-to-risk for every trade you enter so you only have to be right half the time to break even. Of course, that's easier said than done but placing stop loss orders are a great way to force you to stay the course with your trading system and getting rid of some of the emotions involved in trading.

Another thing that has limited my gains is selling my winners too early. When I enter a trade, I have a target sell price in mind. That's all fine and dandy but what happens when it hits that target? That's right, I usually sell it. Like they say, you can never go wrong taking a profit but sometimes I'm right and I sell at or near the peak while other times, the share prices goes through the target price and the really big returns just begin.

In addition to being sure to limit my losses going forward, I'm going to have to develop a more concrete exit strategy. I have a few ideas that come to mind that I will have to refine over the next few weeks but while I do that, I'd also be interested in hearing about your strategies.

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