By Yael Warman

Exiting a trade is what determines whether you’ll make or lose money on a position. For an aspect of trading so crucial, you would think that what this article will explain is rather complicated and requires your full attention, but let us reassure you that while crucial, exiting a trade is actually incredibly simple. The way to exit a trade is this: sell your asset. That’s it.

Now at this point, you may be nodding your head sagaciously, in a “No **** Sherlock” manner while staring lost at your monitor. If you’ve correctly surmised that we have slightly more to say on the subject than that, then read on.

Whilst it is indeed correct that the only way to exit a trade is to sell your assets, the tactics behind deciding when to do so, are slightly more complex. You could simply decide on a whim when to sell each asset, although it’s unlikely that such an unplanned strategy will prove to be successful in the long run. Experienced traders have a number of options available to them as to determine when to exit a trade.

Your Exit Strategy

In order to ensure that your trades are as successful as possible, it is vital to establish a trading strategy for your investments. Two of the most important questions to establish from the outset concern the length of time you wish to invest for, and the amount of risk you are willing to take with your investment.

In terms of the length of time, an investment which you plan on keeping for a maximum of a week will be treated very differently to one lasting a year or more. For a long-term investment, you have decided to play a long game, and will therefore be much less willing to cash in should the market make a sudden move. In the case of a short-term investment, you have various options to ensure maximum profits and minimum losses. The amount of risk you are willing to take will impact on these options as we shall see below.

3 Strategies in Action

1. Stop-Loss/Take-Profit

Most trading platforms allow you to establish a set of pre-determined orders that will be triggered automatically. In the case of short-term investors, you are able to place stop-loss or take-profit orders. These orders can be fixed, and therefore triggered as soon as an asset reaches a pre-determined price, allowing you to limit losses. Some sites also allow you to place trailing stop orders, ensuring that should an asset decline by a set percentage over a set amount of time, the sell order will be triggered. For example, let’s say you invest in the USD/GBP currency pair with a 5% trailing stop order. If the stock steadily increases from $1.30 to $1.45, and then drops 5% in a day to $1.3775, the sell order will be triggered, still allowing you to take home a profit.

2. Price Target

Another possible strategy is to set a price target for your investment, and sell when the price has been reached. Whilst this is a good way of ensuring profits, it can often be responsible for a loss of further potential profit should the price continue to rise further, and you may find that you prefer a more flexible strategy. For example: You have invested in a USD/JPY currency pair when the rate is 110. Due to the simultaneous announcements that the Bank of Japan is reducing interest rates and the US Federal Reserve is raising them, the rate goes well past your target price of 114 and reaches 118. Had you sold at 114, you would have lost the chance to increase your profits.

3. Fibonacci Trading

For more advanced traders, the Fibonacci Trading Strategy is a popular one. Appropriate for medium to long-term traders, it is used best when there are trends in the market. The basic idea is to buy on a retracement at a Fibonacci support level when the market is trending up and to sell on a retracement at a Fibonacci resistance level when the market is trending down. A Fibonacci pattern is visible when prices move in levels such as 0.328, 0.5, or 0.618. This strategy requires mastering before using!

Bottom Line

The most important thing is to have a strategy and stick to it, no matter how tempting it may be to change mid-course. Whether the strategy takes the form of a pre-determined automatic order, or a pledge to take a course of action when a certain point is reached, experienced traders have planned their exit strategy before they have even placed a trade. Not so simple after all, but a worthwhile read, I hope!

About the Author:

Yael Warman is a creative writer with a strong background in marketing and advertising. Yael has been a writer for over 10 years and has worked for clients in various industries as well as her own companies and is currently the Content Manager at Leverate.