topic 2: EXIT: risk management : mrtq13

You have asked the most important questions that a trader could ask…. At the beginning of his trading life,the first question a trader usually asks is “when do I buy a stock?” After some trades this very trader will desperately ask, ”when do I exit when I am in loss or profit”. Why? It is because he finds out after entering a stock he loses his way, he knows nothing of when to exit and nobody else also seems to know that. He finds that exit is more difficult than entry. Any fool can enter into a stock. But it takes a lot of calculations or planning for exit. Let’s discuss some topics here(this one is basically written for beginners or those who are confused about exit/pullback etc.Experience trader may add their view)…….
Exit :
Depending on your trading style, you should develop a plan of your own on how you want to exit from a trade. There are short term trader,there are long term trader,there are mid term trader. Each has his own style of Exit point.
A trader I know exits a trade after entering into it ,be it a winning one or a losing one,just after 4 days of his buying…. That may sound strange. But it is his style. His style is “Time based exit”.
There are two different Exit plans needed for trading. One plan is for just after entering a stock/buying a stock. Another for the stock that is in profit. The first one is called “stop loss” or “initial stop”. The second one is called “trailing stop”….
Stop loss point :
You enter into a stock and it starts to fall. What are you going to do? You have two options- either you keep it on hold hoping that someday it will come to your buy price. Or,you get out of it taking some losses. The choice is yours.
But statistically it is found that it is better to exit a losing share taking a little loss. Think about what happened to Rupali Bank. There has been more than 50% retracement in this share. Those who bought at the top lost 50% money. If they exited early taking small lose like 10%,they could save 40% of their invested capital. And the problem is they have to wait for the share to come to their buy price for several months. Which itself is another loss. Because you cann’t invest in other stocks. Your money is stuck into a losing share…………So, if you're stubborn and stick with your falling stock, things could get ugly. You believe the stock will turn around, only it doesn't. Instead, it drops 15%, then 30%, then 50%.
Ok, now a simple technique that can be used is percentage stop. The idea is a trader should get out of a stock that has fallen 7% to 8% below his buying price. For example,you buy a stock with 100 taka. And it goes below 93 taka(closing price). You should sell it. Because there has been 7% fall from your buy price.
Why is this measurement!!! The reason is simple. Think about it…Why should a stock go below 8% of your buying price if you have bought it at the right situation. It means that the stock’s price is falling.Or,you have bought the stock at wrong time…….. Now is it in correction or pullback? You don’t know. If it is in correction,you are in trouble. If it is in pullback,then it should not go below 8%. Because that would be too much fall……..Why is it falling?
Now is 7% or 8% magic number!!! No,they are not. They are just a technique/rule to make you a disciplined trader.-a trader that knows what to DO. A fighter that doesn’t know what to do under fire dies fast…..
Depending on your trading style this percentage should be set. For example,if you are a long term trader, you could tolerate 15% fall of price from your buy point. Because you are holding it for a long term. And on your way,the price could fall 15%.........Or,if the stock is good enough,you can tolerate 20% fall of price from your buying price………..So,it is up to you……….If you are a short term trader or your investment capital is low,you could tolerate not more 6% fall from your buy price…….
What if you exit after 7% lose and then the stock starts to rise….  You re-enter…..You have nothing to do… And it could be that after you re-enter,the stock could start to fall again…….
Trailing stop :
Trailing stop is another kind of stop which is also based on percentage measurement. It is used for profit taking.………..When do you take profit if you are in profit and the stock has started to fall from the top price……One simple method is to take profit selling the stock when it falls 10% from the top price…….For example,you have bought a stock with 100 taka. And it went to 120 taka without any trouble. And after it reached 120 taka, it then started to fall. You have to take profit.When are you going to take it…. You take your profit by selling the stock at around 108 if your planned trailing stop is 10%..............
Note that the higher a stock goes from your buying point,the tighter the trailing stop should be. For example,your initial trailing stop for the 100 taka’s stock above was 10%. You planned to sell the stock if it goes below 109 taka from 120. Now what do you do if it goes up more than 120 taka,say for example,what if it goes to 150 from 120 taka. You tighten your percentage from 10% to 6% depending your style. So,now if it falls below 141 taka,you get out taking profit………..So,it can be said like this : your price goes from 120 to 130 to 140 to 150. You set your percentage from 10% to 7% to 6% to 5% etc. The higher the price goes,the tighter the trailing stop gets
You have to adjust your trailing stop on periodic basis……
And remember that you can’t sell a stock just at the top level…You have to sacrifice some profit.According to Dr. Van Tharp,a great trader in U.S stock, “the ironic part of trading is if you want to maximize your profit,you must be willing to give back a great deal of the profits you have already accumulated……….”
There are several other techniques that can be used as exit point. For example,support level,Resistance level,Moving average points, Average true range,etc…... But they are bit complex and you may need Softwares to measure them. One of the famous exit technique is Average True Range,which I personally use……...
It is nice if something automatically calculates the exit points for you. You then can be stress free and your time will be saved. A trading software can do it for you and show you the way to exit visually. That’s a great thing. Because computer is always stronger than human brain in the matter of calculation………..
You can use Excel for calculation of percentage,too…………..
Here are what I told myself before I developed my own style :
Have your own plan. Take the best techniques from other traders. Refine and modify them to suite your personality. Write them on paper and periodically polish and update them from your experience……..Manage your risk,manage your exit……….
Remember what Zen says :
The ultimate Zen trading question: How do I know I'm right? Zen answer: There is no right and no wrong. You manage risk. Do that well, and you're right.