Entries and Exits

Entries and exits are the most important component of a trade. An entry at the wrong time can ruin a trade just as well as an exit placed too high or low.

Entries need to be carefully picked. If you are buying on a break of a pattern you need to be sure that the break is not going to fail. The first thing to do is make sure to buy on a close of the confirmation. Just because the price action rises beyond a line of the pattern does not mean it will stay there, always wait for the closing price to confirm. Once the closing price has confirmed a break an entry into the stock may look good but it is still best to wait. The price action should not close under the line it broke, fake breaks are common and mostly short-lived. Because of this it is best to wait for a while after a break, I like to wait at least three days unless the break is especially violent. Remember, the broken resistance will usually turn into support. It is not uncommon for a pattern to break and for the price action to bounce along the top of the broken pattern for a while before moving up.

Exits are just as important as entries. They cap both your maximum loss and gain. The first type of exit is the stop-loss. A stop-loss represents the maximum risk you are willing to take. Note that a stop-loss that is too close to the entry can be more risky than a further out stop-loss. Good places for a stop-loss are underneath moving averages, underneath old lows, underneath trend lines, and underneath patterns. It is important to place a stop-loss and leave it where it is. If you get into the habit of moving stop-losses as the price gets close to them you will quickly find yourself broke. The other type of exit is the take-profit. Take-profit points tell you how much money you stand to gain from a trade. If your maximum profit is lower than your maximum loss (1.00 profit to 2.00 loss for example) you should reevaluate your trade. Take-profits are usually placed under moving averages, old highs, and trend lines. Some trades may try to profit from the movement of the price within a pattern, in this case the take-profit should be underneath the current high point of the pattern.
A good rule of thumb to use is 10%, for example if you expect the stock to move to 30.00 and you buy in at 25.00 a good place to sell is ((30-25)*0.9)) 29.50. This captures 90% of the move that you are expecting. A less profitable way to do it is taking 10% of the expected final price, 10% of 30.00 being 3 you would place your take-profit at (30-3) 27.00. Of course 10% won't work in all situations, its simply a good baseline to work off of. For stop-losses you can do the same thing but I prefer to place stops just a little under the expected low point. Some people like to cap losses at 10%, meaning if they buy at 20.00 they have a stop-loss at 18.00, this is a good thing to do. If you are unsure of where to place a stop simply place it at a 10% loss.

Sometimes a move doesn't go the way you want. Maybe you placed your take-profit at 30.00 and the stock hit 29.00 and then began to go down. Should you end the trade? Maybe. You should definitely look at the chart and ask yourself "Would I buy this right now?" If the answer is no then sell. A small profit is better than a loss. At the same time you shouldn't get trigger happy and sell as soon as you see a profit. As they say, "Cut your losses short and let your gains run", just don't let your gains run into the ground.