Develop A Strategy for Selling
Regardless of the Markets you decide to trade, i.e. stocks, futures, or derivatives you need to develop a strategy of how you are going exit the markets. You will often here it said that successful trading is more about exit strategies than entries. Here are some considerations:
Strategy for Selling
- Set a desired minimum goal for each trade. You may be happy making $50 per trade. Or $500 per trade. Set a price goal you are happy with making from selling the stock. Don’t be angry if the price goes up after you sell. You can’t see the future and mentally it can be unhealthy for you to second-guess yourself.
- Use Stop-Loss Orders to reduce risk by selling at a pre-determined lower price. Personally I use mental stops, but if you’re new at trading this can be dangerous psychologically. Read more about exit strategies.
- After you buy the stock, what is the lowest price you are willing to sell at?
- How much are you willing to lose if this trade if you are wrong?
- Most traders are willing to risk or lose 1% – 3% of their entire portfolio value per trade. Example: Your entire portfolio value is $10,000. 3% of $10,000 is $300. On this trade you use $1,000 to buy. At 3% risk, you are willing to lose $300 of your $1,000. The stock price can fall 30% before this 3% loss dictates selling.
- Will you sell the stock immediately, before your stop-loss price is met, if other factors arise? Such factors may include poor earnings, weak or declining market, market corrections, poor news, lost contracts, etc.
- When will you sell the stock if the price rises and continues to rise?
- Some traders set a specific goal, perhaps 10% gain or 25% gain, and then they will automatically sell.
- Some traders continually raise their stop-loss prices as the stock price climbs. This is called trailing stops or raising stops and can be a very useful tool for locking in gains and reducing risk.
- One strategy I employ when possible is to take my cost basis out and hold the rest.