Exit Strategies - Part I
This is the first free day trading strategies article of a three-part series. You’ll see a link at the bottom of each page that will take you to the next part of the story.
“It ain’t over til the fat lady sings”, is a reference to the patience required for listening to a long opera. But it’s also a handy reference to the truth that the trade isn’t over until you’re out of it. How many times have you been long on a day trade and you’re excited about the money you’re making and then suddenly the trade goes against you? You have the feeling that the market owes you something because the profit was sitting in your account just a minute ago and now it’s gone. So, good day trading strategies are only as good as the exits that capture the profit.
A difficult thing about day trading for new traders is that stocks and markets are constantly shifting around. We cannot control the future direction of price. All we can do is make our best decisions on the future direction of price based on our understanding of the charts. But the free day trading strategies shown in this series will help you.
Within one single strategy, there can be multiple ways to exit the trade. Our choice about the exit will depend upon what price is doing. And we never really know what it will do next until we’re actually in the trade and begin following it. The key thing is to be flexible, not rigid. The stock you are trading owes you nothing. It is free to act however it wishes. Your responsibility is to make the best possible exit based on the chart in front of you.
There are five basic price movements that occur with stocks and I‘ve listed all of them under this category of free day trading strategies. Categorizing price movement in this way can be a helpful tool when trying to deicide upon your exit strategy.
1. The perfect pattern.
This is the stock that forms a perfect pattern within a single time frame. If we're playing it long, then it makes a perfect arch with the candles forming higher highs and higher lows. The price action gives us little reason to exit the trade until it makes a nice leveling off period in which we calmly exit the trade with a sweet profit. Exiting a trade like this is easy. You watch for price to slowly level off, moving your stops up as price goes higher. Then, once you think the top price has been reached, you calmly exit your entire position at the highest possible price. Oh that more trades were like this one. This is the sort of trade in which moveable stops work great. That is, of course, if you are willing to hang on for the longer ride. Unfortunately, most day traders get nervous when they start making a profit and they run to seize the profits before the trade is really done.
One of the things I encourage traders to do, in this section on free day trading strategies, is to look at multiple time charts. For example, if you are stuck on trading the one minute charts, then you might find it beneficial to look at three minute and ten minute charts as well. The indicators you are using on the one minute chart may have maxed out for that time frame, but the larger time frame tells you that price could continue higher. This enlarged perspective on the trade set-up can increase your profits when price is moving in this ’perfect pattern”.
2. The ping.
Second in our list of free day trading strategies is something I call "the ping". This is the stock that shows all signs of going higher, but then it stops and bounces back and forth within a narrow channel. As it does so, price enters a tight Bollinger Band squeeze and it becomes anyone's guess as to which way price will go next. My belief is that time equals risk. The longer you are in a trade that fails to move in your direction, then the riskier that trade becomes over time. So, with a pinging stock, in the interest of preserving equity and reducing risk, your best exit is often at the top of the ping line, rather than nervously exiting at the bottom of that channel.
The way in which you find the ping lines is simple. Widen your chart perspective so you can see the one minute price movement for the entire day. Then use the drawing tool on your chart platform that allows you to draw horizontal lines. Draw lines, or draw a box, that outlines the areas of support and resistance that define the ping. Then use that information to make your best exit.
It doesn’t matter if the pattern is conforming to your day trading strategies or not. See what price is doing and take the best exit. Unfortunately, most traders set a stop loss order below the bottom channel and do not exit the trade until it becomes a losing trade. The lesson here: it's okay to exit a trade at break even if the stock no longer qualifies as a winner. You do not have to wait for it to become a loser. Watch the pinging action as price debates two separate horizontal lines and then intentionally choose your best exit.
Click here to see Part Two of Free Day Trading Strategies.