Stock Trading Exit Strategies
The primary goal when investing in the stock market is to make money. While an investor can be up on her investment, she has not secured the profits until she closes her position for that particular security. Conversely, if an investor is losing money, that loss is not stopped until the stock is sold. In either scenario it is wise for an investor to have an exit strategy in place in order to lock in gains, or limit losses.
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Take Profit Orders
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Many investors do not have the time or ability to watch stocks on a moment-to-moment basis while the market is open. Many investors employ an exit strategy by placing a take profit or "TP" order. A take profit order triggers a market order when the stock has by-passed a certain threshold. If an investor has 1,000 shares of Company X which is worth $10 per share, she can place a take profit order to sell that stock at a higher price. She sets the take profit order at $12, the moment that is reached, the stock will be sold. A market order fluctuates and is not a set price. So when the order is triggered, the actual sale price might be above or below the $12 mark. In this manner the take profit order has allowed the investor to exit the security and lock in profit.
Stop Loss Order
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Even the best investors choose stocks that do not appreciate in value. One of the keys to stock market success is to limit the amount of losses taken. There is no point on when an investor should exit a position, as it is up to the individual investor, her risk tolerance and her investment goals. However, whatever that threshold is, use stop loss orders to limit the downside. Using the same example from above, the shares of Company X went down to $8 per share. Set a stop loss limit that triggers a market order the moment the stock hits the predetermined limit. In this example, the limit was $8, a market order would be triggered and the stock would be sold allowing the investor to exit her position.
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Trailing Stops
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Another way to exit the stock market is to employ something called a trailing stop. A trailing stop trails the price of the stock as it rises and then signals a sell order when the lower boundary of the stock price is crossed. An investor has 1,000 shares of Company X at $10 per share and she places a trailing stop of $2 per share. This gives her an exit position of $8 per share ($10 subtract $2 = $8.) As the stock rises, so does the stop price. If the stock rose $3 per share--it is now worth $13. Since the stop is trailing, it too rises $3 and is now set at $11 per share. If the company receives terrible news and the stock gets sliced in half, an investor has some protection because a trailing stop would trigger a market order the moment it hit $11 per share. In this manner the investor can exit the position to still recoup profit even when a stock is getting hit hard on the street.
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References
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