Stock Trading Exit Strategy

You should know your stock trading exit strategy before you buy a stock. This simple money management strategy can limit losses and save you from having a large loss when your trade goes against you.

A stock trading exit strategy is easier to set before you buy a stock than after you buy

Lets look at the following example. Below is a 4 month stock chart of AST.TO. in early September 2024, a divergence formed between price and the MACD line and histogram suggesting that even though a new low had formed, based on those indicators, the stock was stronger than it was previously. Think of it this way, the stock is dropping at a slower rate than before.

Knowing this, you wait for an entry. Prior to September 17, you note that a higher high will be formed once the high takes out the high on September 12 and you decide to place a buy on stop order into the market.

Next you need to identify where you want to get out when the stock goes against you. You only want to risk $500 on this trade. There are likely multiple exit points you could use. Your exit strategy will determine which one you choose.

The market has identified two obvious spots where a stop could be placed. These would be just under the lows of September 5 and 16. For the sake of this discussion lets go with 5 cents below these lows as well as one ATR(14) [$1.00] away from the lows. From a slightly different perspective also consider 3 ATR(14) away from the stop price of $35.61.

Therefore, the potential exits are:

From the low on Sept 16: 34.68 (risking $1.83) or 33.73 (risking $2.78)

From the low on Sept 5: 33.42 (risking $3.09) or 32.47 (risking $4.04)

Three ATR(14) [$1.00] away from the buy point of 36.51 or 33.51 (risking $3.00).

The tighter your stop, the more shares you can buy without risking more. You need to decide where you will put your initial stop. Once it is set, only move it upwards as the stock moves up. Never move your sell stop downwards.

Chart courtesy of StockCharts.com

Exit Strategy for Profits - Scaling Out

Once you are into a trade you need an exit plan. Are you going to scale out of the trade, buy more as the trade goes in your favour or are you going to sell when the market sends you a signal.

A signal from the market will be determined by you and could include ideas such as: moving average cross over, a lower low, a trendline break or some other indicator or perhaps based on time.

In many cases, one of the most difficult aspects of trading is to determine at what point should you be selling the stock.

As you are risking $1.83 per share and want to get to break even as soon as possible, you decide to sell 1/3 of your position at a price which will get you to break even. You therefore enter a sell limit order at $42.00 which is hit on October 15. As the stock moves higher, you place your stop 5 cents below the low of Oct 11 and are taken out of the trade unexpectidly at $38.79 when the stock opens lower after the US Presidential election.

Generally, the closer your stop loss sell point is to the market, the higher the probability that you will get stopped out. So when you set your sell stop, it should be at a place where strength has appeared in the past.

Selling at a high point will typically make you more money in the short term but may not in the long term.

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