Effective Stock Market Exit Strategies Guide for Investors

Exiting a Trade

When you trade in the market, there are only two possibilities arising when you plan to exit it, either you will end up with a loss or book some profit. Exit strategies are often planned around these two scenarios. Exit strategies are often characterized by terms including book profit and stop loss, depending on the type of exit required. Abbreviations such as SL are also used for these terms.

So, without further ado, let us take a look at these strategies of exiting a trade in the market.

• Stop–Loss (SL) Orders - These orders are one of the most recommended strategies in the market. As the name denotes, they limit your loss at a pre-defined level. These orders can be placed with your broker for selling and exiting your open position at a pre-defined point. When the price of the stock reaches this level, your position is automatically converted into a market order for sell which means that your open position will be automatically exited. This strategy helps in minimizing your losses if the market by chance moves against your expectation.It is always recommended to have a suitable stop-loss applied with all your orders. You can apply a stop-loss which should be above the current market price in case of a buy order and lower than the current bid price for a sell order.

  Stop – loss orders can be further classified in to three types:

  • Day Order - In these orders, the set stop-loss will expire at the end of the trading session.
  • GTC Order - GTC order (Good till Cancelled) remains open until it gets executed or you yourself cancel it. It never expires automatically.
  • Trailing Stop Loss - This type of order is placed to follow a set distance from the current market price.
• Limit Orders - Limit orders are also known as Take Profit (TP) orders. They work very much similar to stop – loss orders, which means that they are automatically converted into market orders when a certain point is reached. The key difference between the two orders is that unlike stop – loss order, there is nothing like a trailing point in limit order. Also, the exit point in case of limit order should be set above the current market price.

Developing an Exit Strategy

Developing an exit strategy depends on two main parameters:

How Long You Plan to be Invested?

This is the first parameter which is to be considered while planning an exit strategy. If you plan to invest for mid to long term, then it is recommended to set up trailing stop loss as it will allow you to lock in profits every now and then and also limit your loss. Exit strategies for long term are usually based on fundamental factors.

This is the first parameter which is to be considered while planning an exit strategy. If you plan to invest for mid to long term, then it is recommended to set up trailing stop loss as it will allow you to lock in profits every now and then and also limit your loss. Exit strategies for long term are usually based on fundamental factors.

Your Risk Appetite

Risk appetite helps you analyze the amount of risk which you can take in the market. Having an idea about your risk bearing capacity will help you determine the horizon of your trade and also the nature of stop – loss you should use. For example, if you have a low-risk appetite you should set tight stop – losses and vice versa.