Whenever traders enter a trade, they must have 3 factors clear in their mind; where to get in, where to take profits, and where to cut and run if market turns against them.
The secret of exiting a trade for professionals is to plan their exits. Before entering a trade, professionals set their specific target and stop price levels. While beginners keep searching for entries.
Why do traders have to think about an exit before they enter a trade? Is it better to monitor the trade after they got in to find exit in response to price action?
The following are reasons for deciding on an exit before entering a trade.
First is to weight rewards and risks for each trade. When traders know their targets and stops, it allows traders to decide if the trade is worth or not? For example, if there is a clear signal to buy at $6, with a target price of $8 and a stop price at $2. Is it worth to risk $4 to gain $2? Price targets and stops prompt traders to focus only on trades that potential rewards far outweigh the risks.
Second is to help traders to maintain their money management rules. Setting profit targets and stops before entering helps traders to avoid a trade that will break their money management rules. For example, if traders have a $100 account and want to risk only 2% in each trade. When there is a signal to buy at $6, with a stop price of $2. Traders should not take it.
Lastly is to help traders sidestep the “ownership effect.” When people get attached to things they own and lose objectivity. Traders are more rational when they make decision before they own that trade. That is why they need to decide on exits before a trade becomes theirs.
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