Have you ever been caught up in an options trade that you wanted to exit but couldn’t? This lesson will help you understand common technical and psychological pitfalls day traders fall into once they’ve entered a trader and exit strategies to help you get out before emptying your entire trade account.
Day traders at both beginner and experienced levels repeatedly tend to make the same mistakes. And the sad part is that most of these mistakes could have been easily avoided. Here are a few frequent mistakes carried out by day traders and some suggestions for self-correction.
1. Under or Overstaying Your Welcome
Many traders have a good entry plan but a poor exit strategy. They, in turn, end up choosing a less than ideal time to exit a given trade. You should add detailed technical specifications to determine when you must exit the trade in question.
2. Attempting to Recover a Previous Loss
Let’s say the trade was initially going in the right direction but then made a turn, resulting in a loss. Do not struggle to get even. If you hope to become an expert trader, get used to being wrong regularly, and then work it into your trade strategy.
3. Ignoring the Trend
Focus on the logic and trends behind the numbers. Instead of looking for a way to improve your image or self-esteem at that moment, focus on price action.
4. Averaging Down
So you just gonna hold on to that bad trade until the end of the day? Please don’t. Why? Partly because of a thing called time decay – a measure of the rate of decline in the value of an options contract due to the passage of time. Time decay accelerates as an option’s time to expiration draws closer since there’s less time to realize a profit from the trade. In other words, you can quickly lose a position you were holding on to, which is a sacrifice of money and time. Get out and place that money in a better trade entry.
5. Being Overzealous, i.e., Greedy
Some traders will ignore consistent profits in favor of home runs, leading to a significant loss. You should take it slow when it comes to building your rate of return and/or making a profit. Never risk more than you can afford to lose.
6. Giving in to Fear
Fear might be the most significant emotion for traders. Many traders struggle with this emotion, which can demobilize you from applying your hard-learned options strategy. Significant trading losses often lead to emotional distress and turmoil – another reason to have your exit strategy locked down.
7. Following the News
“The chart creates the news, not the other way around”
Given the ease of access to financial data these days, a trader can be bombarded with news from many sources, including large media companies like the Wall Street Journal and Bloomberg, to social media outlets such as Twitter, Facebook, and Reddit, among others.
You should strive to use only the chart to decide your trade exit. When this is done right, the news becomes irrelevant. Why? Because the trader will make a trade because of a change in the chart, which will later become the news. So, if you are waiting for reports to give you direction, you are already late.
Before you start trading, you should know what you’re getting into. You should plan your exit strategy before entering a trade because your emotions will cloud your judgment once you are in the trade. There are two things to consider when you are creating a trading exit strategy:
- When will you get out of the trade if it doesn’t go in your favor?
- Where and when will you take profits if things go in your favor?
Other questions to consider include how much money do you intend to make and how much do you not want to lose (although it is suggested that you ignore profit and loss indicators for a while and just work on your strategy)? Also, what is your risk reduction plan?
Once you have answered these critical questions, you will be able to make appropriate strategies and learn how to exit with the least possible trauma when you’re losing. Below are some tested methods for exit if things go wrong or right.
If Things Go Wrong
It is a known fact that stock options are highly volatile, whereby a trader can often see fluctuation in value by 10-20% during the trading day. So, if your trade reverses negatively against you, you can apply a mental stop loss or a technical stop order.
Zone Stop Loss
Once you’ve taken the trade, quickly find a place to cut your loss and move on if it’s not moving in the right direction. Locate the nearest zone to place a hard stop, i.e., stop loss. See How to Draw Supply and Demand Zones. The top or bottom of the zone is where you will exit your trade if it drops in value by a certain percentage.
Learn to swallow your pride and pay attention to the feedback a lost trade gives you. There is no reason you should lose all of your money in a trade.
Active Trader Stop Loss
With thinkorswim, the stop order (sometimes called a “stop-loss”) allows you to enter or exit a position once it reaches a specific price level. Once your activation price is reached, the stop order turns into a market order, filling at the next available ask price (in the case of a buy stop order) or the next available bid price (in the case of a sell stop order).
Exiting losing trades is an expected part of trading. Sometimes, simply closing the trade is the right decision. It might be best to let the chart inform you on what to do next. The assumption here is that you’re managing this losing trade before things get out of hand.
If Things Go Right
Once your trade has gained, say 30-50%, begin to look into either protecting your profits or at least ensuring that you don’t lose what you’ve gained so far. Enter a hard stop at a chosen price, percentage, or profit target, or a trailing stop at the upcoming zone or price target. Again, do not get GREEDY. This takes practice as it’s more of an art than a science.
Whether you are buying or selling options, define your exit plan.
An exit plan can help you establish more successful trading patterns and keep your worries in check.
Determine an exit plan for the upside win the trade is moving in your favor.
Determine an exit plan and a worst-case scenario you are willing to tolerate on the downside.
If you reach your upside goals, clear your position and take your profit. In other words, get out now. Don’t get greedy.
If you reach your downside stop-loss; once again, clear your position. Don’t expose yourself to further risk hoping that the options price might come back.
What’s Your Day Trading Exit Approach?
Nearly every options trader knows how to get into a trade. The tricky part is knowing when to get out. Your approach may take on one or more of the following methods.
- You could take a time-based approach, whereby you stay in the trade for a certain period.
- You could target profit by setting a profit goal and then exiting the trade once the profit target is met.
- Alternatively, you could apply a technical exit, which requires patience. You only escape when the chart gives you a technical signal to leave. This signal may come as a pullback at prices, stalling at support or resistance, going sideways, or several other signs.
As you begin your new day trading journey, keep in mind that learning to exit a trade correctly requires learning to operate a trading platform, read a stock options chart, and manage your emotions. It also takes studying, coaching, and practicing key entry and exit strategies to build your confidence to make consistently successful trades.
A Proven Exit Strategy
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
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