Step 4- Exit Techniques & Strategies

Welcome to yet another important article regarding the advanced options trading strategy. As we had discussed in our previous article, we had discussed the special options adjustment’s strategies. I hope you enjoyed reading that article. Now, in this article, we are going to learn about the exit techniques and strategies which are going to be very beneficial for all the traders.

As you know that there are four steps in the options trading strategy. These four option trading strategies are market view, entry, adjustments, and exit. So, we are going to learn about the exit strategy. So, we will learn like should we exit through manual way or automated way. What are the benefits of manual and automated ways? How we can plan our profits and loss according to our risk management?

So, manual exit means you are in front of your pc and you exit your position manually. Most retail investors do this type of exit strategy. While automated exit position means you put the target and stop loss in advance. So, the price will reach either at the target first or the stop loss first, your position will be closed automatically. According to me, I generally prefer the automatic exit position because the system will do the trade at the fixed target and stop loss.

Many traders do strong exit strategies, but then don't follow through when the time comes along their way to take action; the results can be very bad. When making your plan, start by calculating reward and risk levels before jump into a trade, then use those levels as a stick idea to exit the position at the best price, whether you're making profits or taking a loss. Market timing, an often-misunderstood idea, is a good exit strategy when used the correct way. Stop-loss and target methods also enable common sense, retail investors to protect profits and reduce losses.

It's impossible to talk about exits without noting the importance of a holding period that will work well with your trading strategy. The magic time frames forcefully align with the broad approach chosen to take money out of the financial markets. There are only two ways you can close a trade: by taking a loss or by making a profit. When talking about exit option strategies, we use the terms take profit and stop-loss orders to mention the kind of exit being made. Sometimes these terms are known as "T/P" and "S/L" by traders.

Get into the habit of choosing reward and risk targets before entering each trade. Look at the chart and find the next resistance level likely to come into play within the period of your holding time. That tells us the reward target. Then find the price where you'll be proven wrong if the underlying asset spin and hits it. That's the risk target. Now find out the rewards/risk ratio looking for at least 2:1 in your favor. Anything less than that, and you should skip the trade, moving on to a better opportunity in the future.

Focus trade care on the two key exit prices. Let's suppose things are going your way and the advancing price is moving toward your reward target. The price rate of change now comes into action because the faster it gets to the desired target, the more flexibility you have in choosing a favorable exit position. Your first option is to draw a blind exit at the price, reward yourself on the back for a job well done and move on to the next trade. A better option when the price is trending strongly in your favor is to let it excel the reward target, placing a defensive stop at that level while you attempt to add to gains. Then look for the next obvious trade, staying positioned as long as it doesn't come against your holding period.

Money Management is one of the most important and least understood terms of trading. Many traders, for instance, enter a trade without any set of rules of exit strategy and are often more likely to take fewer profits or, worse, run losses. Traders should understand what exits are obtainable to them and attempt to generate an exit strategy that will help minimize losses and lock in profits.

When it comes to option trading, the decision of when to buy a stock can sometimes be easier than understanding when is the correct time to sell a stock. Finding out exit points is key, both to limit downside losses and to take profits before those opportunities vanish. Stop orders are a useful tool for working on your exit strategy and can be updated as your view on the market changes.

We should also know that risk is an important tool when investing. When finding out your risk level, you are determining how much you can manage to lose. This will define the length of your trade and the type of stop-loss you will use. Those who want less risk tend to set compacted stops, and those who suppose more risk give more plentiful downward room.

So, in conclusion, I would like to say that Exit strategies and other money management techniques can mostly increase your trading by eliminating emotion and reducing risk. Before you took a trade, consider the exit rule, and set a point at which you will sell for a loss and a point at which you will sell for a profit. I hope you enjoyed the article.