How to Find a Good Exit in Trading

For many traders, finding a good entry point into a trade is often the easy part. The challenge comes with knowing when to exit the trade. However, knowing when to get out of a trade is just as important as knowing when to get in, and finding the “perfect” exit can make all the difference between a successful and a losing trade.

Today I’ll try to give you some tips to help you to find good exits.

What is a Good Exit?

At first, I wanted to entitle this article “How to Find the Perfect Exit”. But you don’t want to find the “perfect” exit in trading, because you will never find it. You just want a good exit. But what is a good exit?

Well, it’s hard to define a good exit as it will be different for each trader. It depends on a variety of factors such as risk tolerance, trading strategy, market conditions, and time frame. However, in general, a good exit should allow you to take advantage of price movements while avoiding significant losses.

In order to find a good exit, you should first have a solid risk-management strategy. You should know what is the maximum risk you’re willing to take for each trade, or things like the maximum drawdown you’re willing to handle in a week. Some traders may prefer to exit a trade as soon as they reach a small profit, while others may prefer to hold on to a position longer in the hopes of larger profits. Similarly, some traders may be willing to tolerate larger losses if they believe the market will rebound, while others may prefer to exit a position at the first sign of trouble.

So, it’s up to YOU to define what is a good exit.

Factors to Take Into Consideration to Define your Good Exit

A variety of factors can affect your definition of a good exit:

• Market Conditions: The market conditions can have a significant impact on your decision to exit a trade. For example, you can define a rule saying that if the market looks volatile and unpredictable, then exiting an opened trade is the good thing to do.
• Risk Tolerance: Every trader has a different level of risk tolerance. Traders with a higher risk tolerance may be willing to hold onto a position longer, while those with a lower risk tolerance may prefer to exit earlier to minimize potential losses.
• Trading Strategy: The type of trading strategy being employed can also affect the decision to exit a trade. A swing trader may look for a larger profit target and exit a position after a few days, while a day trader may exit a position within a few hours or even minutes.
• Time Frame: The time frame of the trade can also impact the decision to exit. The lower the time frame, the quickier you should exit a trade.

Once you have defined rules depending on these factors, you can start asking how you can concretely find a good exit.

Tools to Find a Good Exit

You have many tools available to help you find a good exit.

First, technical analysis can help you identify key price levels and trends that can be used to determine a good exit. You don’t have to make it complicated, just support and resistances can do miracles.

There is also fundamental analysis that you can use to identify important events that can impact the price of a security. You have to keep informed about the latest news and data releases if you don’t want to get tricked.

Finally, there’s also backtesting. Automated trading tools or manual backtesting can help you to fine-tune your strategy, allowing you to eventually find better exits by defining precise rules.

General Advice

Keep in mind that the following pieces of advice come from my experience. Some people may tell you the opposite.

• Use stop loss orders: I never open a trade without a stop loss order set at my max acceptable loss.
• Stick to your plan: Don’t close a trade because you “don’t feel it”. If you have done your analysis correctly, you should then ignore your emotions.
• Don’t listen to the mantra “Let your profits run”. You can be profitable by cutting your profits early. Just do the maths. If you have a 90% win rate with an average profit per trade of $100 and an average loss of $700, you win on average $900 per 10 trades and lose $700, so in the end you’ve made $200. By the way, it’s better to have a strategy with a 99% win rate, an average profit of $1, and an average loss of $98 than a strategy with a 1% win rate, an average profit of $100 and an average loss of $1. Theoretically, the result is the same in the long term (you make $1 for every 100 trades), but the drawdown may be higher in the second case because you have more losing trades in a row.

Final Note

Of course, it’s not easy to find a good exit in trading. The best you can do is to define your strategy so that you have fixed rules and act mechanically.

That way, you shouldn’t have to worry about getting out of a trade. This means that you should not enter a trade without first planning its exit.

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