An investor should not only focus on getting into a trade, but also on getting out as well. Exit strategies are vital for risk management, safeguarding an investor’s capital and restricting losses.
They are also important to profit taking, which could be put to work in new positions. Therefore, an exit strategy could be the way out of a trade and it could provide capital for an investor to enter into the next trade.
Several traders use a combination of tools and analysis to enable them to develop their exit strategies. By doing this, they are looking to identify the level at which to liquidate their position.
However, in order to put the tools and technology to work, a trader must select the appropriate approach. Here are three exit strategy approaches:
Identify Support and Resistance Zones
An approach to constructing an exit strategy is to use technical analysis and charting system to determine trend lines on the basis of historical price. Traders would then be able to identify support and resistance zones (probable entry and exit points).
A resistance zone is a price zone in which the stock could continually move up without breaking through to new highs.
A support zone is a price zone in which the stock could retrace continually without falling below to new lows.
Allow The Profits to Run
Another exit strategy would be to let profits run and reduce losses short. The thinking behind this exit strategy is that a position is worth holding on to as long as it’s gaining, and it must be sold when it falls.
Do Not Take All the Profits
It would not be required to take the complete profit at once. If an investor believes the investment is near the top, but there’s a probability that it could go further up, the investor could exit a part of the position (scale out) and take some profits. This could be an efficient strategy in flat/low-volatility markets.
An exit strategy could be both a profit-creating strategy and a risk-management strategy. They can be applied in low-volatility markets as well as the higher volatility markets with huge swings. An investor has several options when creating exit strategies.
Sophisticated platforms would assist in simplifying the process and in identifying probable exits. Implementing the exit strategies are often a combination of philosophy, technology, and tools. It is for the trader to determine the mix with a focus on safeguarding against losses and maximizing profits.
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