Exit Strategy: How To Lock In Your Gains And Limit Your Losses

A smart investor always has an exit strategy when investing in the stock market. Daytraders are  successful because they have exit strategies for all their stock purchases everyday. I learned the hard way by not having such exit strategies in any of my stock purchases. Even when the stocks went up and I was jumping up and down with joy, I eventually ended up losing all of the profits and then some more. I had good initial entrance strategy, but I failed to implement a good exit strategy to lock in those gains. I foolishly believed that the stock price would continue going up forever! I learned that it’s all paper money until I cash out. It doesn’t matter if I’m up 1000000% at one point in time. I need to be up 1000000% when I sell and cash out.

All of the online trading platforms offer the similar ways to trade stocks. They are available so we can make better decisions for every trade we make. They are there to help us maximize our profits and minimize our losses, but it’s our job to know how to use them. Below are 5 ways you can make a trade. Allow me to go over each one so we can better understand how they work.

Limit

When you want to buy a stock, you can use Limit Order to help you make that purchase at the price you want to pay. It’s kind of like naming your own price when making a purchase. You set the price you want to buy at and when it reaches or falls below that price, it activates automatically and a purchase is made. It’s a good way to control your buy-in price targets. However, if you set the price too low, it may never reach that price because the stock is increasing. In this case, you may be just out of luck. Either you have to look into another stock or buy this one at a higher price.

The same rules apply when selling the stock. It’s a way to implement an exit strategy when you’re already in the profitable region. You can enter a price you want to sell at, even if the stock price hasn’t reached that point yet. Imagine a stock price sitting at $135 currently. Your exit strategy is to sell at $140. In order to do that, enter a limit sell order at $140. When it reaches $140, it will sell automatically. However, if it never reaches that price target, the order will never get filled.

Market

Market orders are same as Limit Orders except you do not have the opportunity to set your own price. Whatever the current price is for the stock, that’s the price you will end up paying. Market orders are dangerous for volatile stocks because the price can fluctuate drastically even in seconds. So when you think you’re making a purchase at the current price, the final price may be a more or less due to time lag between transactions and real-time price of the stock.

Stop Limit

My favorite is Stop Limit Order. A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, the stop limit order becomes a limit order to buy or to sell at a specified price. The benefit of a stop-limit order is that you  can control the price at which the trade will get executed. It’s a way to lock-in your profits as the stock price increases. One thing that’s very hard for any investor to do is to sell when the price has an upward momentum. Optimally, it would be best to sell when that upward momentum is lost and the price starts going down. So with Stop Limit, you can set your own price at a lower price that still locks in your profits. Even when you enter your stop limit order, as long as your stock continues to go up, your order will never be filled and you can enjoy the upward momentum. You can then re-evaluate your stop limit price and enter a new price that locks in your profits even greater.

Trailing Stop

Trailing Stop is very similar to Stop Limit order except that the target or activation price moves along with the current market price. Let’s say you placed a stop limit order at $125 for stock that is currently trading at $135. So, in this case, as long as the price doesn’t go below $125, your order will never be filled. You can still enjoy the upward momentum of your stock. However, if you had placed a trailing stop order, the activation price of $125 will move along with the current market price. If the difference is $10 from activation and market prices, it will remain $10 as long as the price goes up. The moment the price starts going down, the activation price will be locked at its peak price. So, if the market price had gone up to $145, the new activation price will be $135. Remember that the activation price only goes up with the market price and never goes down. This is to help you maximize your profits and limiting the risk of a falling stock price.

Always Have An Exit Strategy For Every Trade

For every trade, you should always have an exit strategy. Whether it’s to lock in your profits or limiting your losses, you want to be able to control your investments. Don’t let the investments control the way you make your trades. I learned the hard way a few years back. Learn from my mistakes and develop your exit strategies for your current investments right now.

Trading Platforms

There are so many affordable trading platforms out there. Currently, TradeKing is offering $50 cash bonus for new customers if you sign up in August. Their trade fee is only $4.95 per trade. Also check out these other competitive trading platforms:

Tagged as: stop limit, trailing stop