NORMALLY WE ASSOCIATE TRADING WITH ENTRY AND EXIT ONLY. THERE ARE OTHER ASPECTS TO TRADING TOO. WHILE ENTRY AT THE RIGHT PRICE GIVES YOU ACCESS TO THE STOCK AT A REASONABLE PRICE, EXIT AT THE RIGHT PRICE ACTUALLY GIVES YOU THE PROFITS. TRADERS ALWAYS MAKE PROFITS WHEN THEY COVER THEIR POSITIONS. HOWEVER, THERE IS THE THIRD ASPECT OF ESCAPE. WHY DO YOU NEED TO ESCAPE FROM THE MARKETS? THERE COULD BE A VARIETY OF REASONS. FIRSTLY, YOU COULD BE STUCK IN A WRONG POSITION AND FINDING THE ESCAPE ROUTE IS MORE IMPORTANT THAN EXIT. SECONDLY, YOU COULD BE IN A TOTALLY VOLATILE MARKET
UNDERSTANDING THE E OF ENTRY INTO STOCKS
This is the first leg of trading. At what price do you enter the stock and how do you structure your order to enter the stock. For example, if the market is trending then you can use a market order but if the market is volatile it always makes sense to use limit orders. Check if the stock is in a downtrend or uptrend. As a trader never try to outguess or outsmart the market but rather focus more on understanding the underlying trend and playing accordingly. A good entry is also about putting the stop loss at the right place. When it comes to stop losses, the level of stop-loss is fixed based on your affordability and the technical levels of the stock. The stop loss is normally set slightly below the support level for a buy trade and slightly above the resistance level for a sell trade. A good deal of the success of your trade does owe to the manner and level at which you enter the stock. The more foolproof your entry strategy, the more likely you are likely to get a good risk-return trade-off and higher the probability that you will be profitable.
UNDERSTANDING THE E OF EXIT FROM STOCKS
There is a popular aphorism in the market that you commit funds when you enter a trade but actually, make money only when you exit the trade. This applies to short trades and too long trades. That is why exit is so important. If you exit too early, you may miss out the real cream of the trade. On the other hand, if you wait for too long then you may end up missing out on other opportunities. Your exit strategy must be a proper trade-off between the need to get the best price and the need to keep churning your money funds to enhance the ROI. How you manage the profit targets also matters a lot when you exit the stock. Look at phasing out your exit if the stock is too volatile. If the trend appears to be in your favour then try to get the best of the momentum with the help of trailing stop losses. The basic point to remember is that you must never exit a stock when momentum is in your favour on an intraday basis. When you exit makes sure that you can use the funds better!
“I am closely involved with the stock market because it is a lot of funds and sometimes extremely painful” – Regis Philbin
6 REASONS TO PLAN YOUR ESCAPE (THIRD E) FROM A STOCK
- Entry and exit from stocks are part of your normal trading routine. When do you escape from a stock? Assume that you purchased a high beta stock and there were news flows confirming that the macros are deteriorating. For example, the inflation may have shot up or the RBI may have hiked rates or oil prices may have gone up or the rupee may have cracked. When such substantive announcements are made, you should look for an escape route. Losses and potential of the stock do not matter.
- When the markets become more volatile than you can handle, it is time for you to look for an escape route. Volatility is never a great friend of the trader because the market becomes less predictable and there is a very high probability of the stop losses getting triggered. When volatility gets too hot to handle, it is always advisable for you to look for an escape route from the trade.
- What happens when the company you are trading suddenly sees a major churn at the top? Obviously, something is structurally wrong with the company otherwise such a large management exodus is not justified. Even though you are a short-term trader, you must take the cue and look for an escape route.
- Something may be going wrong somewhere in the trade and you are not able to pinpoint the exact reason. It only means that the market is perhaps outside your trading scope for now. When in doubt just avoid the markets. Look for an escape route from the trade and wait on the sidelines.
- You have already lost 50% of your monthly capital loss quota. This is a slightly ticklish situation. If you exit the positions then your chances of recovering the losses go for a toss. That is actually the point. Never try to recover losses through overtrading. If you find that the loss is more than you can bear just find an escape route and use the best possible levels to just get away from your positions and start afresh.
- There are times when the technicals and the news flows are giving very diverse and confusing signals. Obviously, there is something in the stock which even the markets are not able to decipher. The only answer in such situations is to find an escape route from the trade and stay out.
ENTRY AND EXIT ARE FINE; FOCUS ON ESCAPE TOO
A good trader gives as much importance to escape as to entry and exit into a stock. There are times when escape is the only answer and it is also the best answer. That is when you must actually focus on the Third “E” of Escape!