Many stock market participants fail to comprehend that making money from stock markets is a two-part process. As much as the entry strategy needs to be correct, equally important is the strict adherence to the exit strategy. Investors often tend to overlook this aspect and end up with unflattering results, even when their investments could have had better performance if they had planned an exit strategy.
What is the right approach to investing?
Investors generally enter a trade after careful evaluation of various parameters such as the risks involved, the degree of liquidity, etc. Another crucial aspect that they need to keep in mind is to clearly define the period and the returns expected from the investment. Most investors assume that the stock price will only increase, and they remain anchored to a particular price point. The investing formula of buy low and sell high can be good to follow. However, in reality, the markets are uncertain. Stock prices may go in a downward trend, or they can remain stagnated as well. There needs to be an exit strategy in place that takes into consideration all these possibilities.
How important is an exit strategy?
Many investors have no clue as to when to exit a stock position. They get stuck in a big dilemma when the stock price may have fallen or increased substantially. Hence, it is imperative to pre-define the exit strategy by taking the following points into consideration:
- Investment period: This should co-relate to the goal set for investing. If the goal is achieved before the period you had set in mind elapses, and you believe that the stock market is near its high, you can consider an exit. Markets are unpredictable. Hence, once the target is achieved and the time seems right, investors need not further analyse when to exit a trade.
- Appropriate stop-loss: When to exit a stock position does not depend solely on fixing a goal or upper limit for the stock price to be achieved. There are times when the stock moves in the opposite direction, and hence, it is essential for an investor to pre-determine the risk appetite for a particular trade. It’s best to have a minimum price in mind, beyond which, if the stock tanks, you decide to sell it to prevent further losses. Considering all market factors, if an investor sees that the price is not moving in their preferred direction over time and indicators are not encouraging, it makes more sense to exit the position. You can then deploy your funds to some other winning strategy.
So, the best indicator to exit a trade is either when your target for the goal set is achieved or when things have gone wrong with the market showing no scope for recovery.
The above rules also apply to traders who take up short-term trades, including intraday positions. When to enter and exit a stock market in intraday is similar to the basic concept for investing. Be very clear about your goals and your risk-reward appetite and have a defined strategy in place. You can also seek the advice of an expert to help you formulate your investment strategy.