Exit Strategies

We, as traders, spend a lot of time thinking about trade set-ups, and trade entry levels. But, to be sure, it’s the trade exits that matter the most. The price at which one exits a trade ultimately determines whether the trade is a winner or a loser. In fact, two traders can both put on the same trade at the same time, at the same price and one may win, while the other may lose. It’s all about the exits.

Having a tight exit plan is essential for trader success. The premise of what I teach as for exits, stems from the idea that trading has a statistical nature to it—some trades will be winners, some trades will be losers, no matter how good a trader may be. Traders need to set up an exit strategy for both potential outcomes—set up one exit to potentially take profits, one exit to potentially take a loss.

Because the complete trade consists of both an entry price and an exit price, both need to be planned out and set in place before the trade is initiated. Traders must plan their exits before entering into a position. The first and easiest exit plan could be if XYZ gets to $xx.xx you would consider closing the trade. But with options positions another exit plan might consist of reexamining the position with a time target – if XYZ doesn’t get to $xx by a certain date, maybe closing the position should be considered.

Along with this comes discipline to follow through—which is the tough part for most traders. But consider that traders typically spend much time setting up a trade and structuring a position, also consider that the exits are the most important part of the trade. It is, therefore, essential for traders to set up their exits and stick to the plan.

Dan Passarelli