Exit strategies are one of the most overlooked parts of trading and investing, yet they are among the most important. Market swings, emotions, and loss aversion can push investors into making decisions they later regret. A clear exit strategy provides structure, discipline, and protection—helping you lock in gains or limit losses before emotions take over.
1. Why Every Trader Needs an Exit Strategy
Successful traders recognize that their own instincts can be their biggest obstacle. When the pressure rises, hesitation and fear can interrupt rational decision-making. Planning your exit before you even enter a position takes the guesswork out of when to sell.
Key questions to consider include:
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How long do you plan to hold the investment?
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What metrics will you use to judge performance?
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What signals will tell you it’s time to exit?
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What type of order will you use to execute the exit?
A well-thought-out exit plan is useful for both active traders and long-term investors because it aligns decisions with goals rather than emotions.
2. Four Common Ways to Build an Exit Strategy
The file provides a table outlining four major approaches to setting exits (page 2). Each focuses on a different aspect of evaluating when to get out of a trade.
Use the Fundamentals
This approach is suited for longer-term investors. You monitor business performance using financial data, earnings updates, valuation ratios, company news, and other fundamental indicators. If new information no longer supports your original investment thesis, it may be time to exit.
Use Technical Analysis
Traders who rely on price action can use trendlines, support and resistance zones, chart patterns, and indicators to determine exit points.
For example:
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A break below support may trigger a sell.
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A reversal pattern may signal the end of an uptrend.
Technical strategies help define exits based on market behavior rather than assumptions.
Target Profit/Loss Ratios
This method sets predetermined profit and loss levels. For example, aiming for a 2:1 or 3:1 reward-to-risk ratio provides structure around when to take profits and when to cut losses.
Some traders may set percentage-based triggers, such as:
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Sell if the trade gains 10%
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Sell if the trade loses 5%
Time-Based Exit Strategy
Some trades don’t move as expected. A time exit sets a maximum period you’re willing to stay in a position.
This approach helps in situations where:
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Prices move sideways for too long
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A trade drifts slowly against you but not enough to hit a stop
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Momentum fades and the move becomes too slow
When the time limit hits, you reassess or exit the trade.
3. Using Orders to Execute Your Exit Plan
Pages 3 and 4 describe the most common order types used for exits. Choosing the right one ensures the plan is carried out correctly.
Market Order
A market order sells immediately at the next available price. It provides guaranteed execution but not guaranteed price. This is the fastest way out of a trade.
Alerts—such as price notifications—can help you act without letting impulsive emotions dominate.
Limit Order
A limit order lets you set the minimum price you’re willing to accept when selling. If the market reaches that price, the order executes at that level or better.
Limit orders protect you from selling at an unfavorable price, but there is no guarantee the order will fill.
Stop-Loss Order
A stop-loss triggers at a specified downside price and becomes a market order. It helps protect you from large losses, but it may not fully protect against sharp price gaps.
A trailing stop adjusts automatically as the price moves in your favor, raising the trigger level to preserve gains.
Stop-Limit Order
Similar to a stop-loss, but once triggered, it becomes a limit order instead of a market order.
This protects the price you receive but does not guarantee the order will execute if the market moves past your limit.
Conditional Orders (Bracket / OCO)
Pages 3–4 show an example of a one-cancels-the-other (OCO) setup. This order combines a limit order and a stop order:
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If the price hits your profit target, the stop order is canceled.
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If the price hits the stop-loss, the limit order is canceled.
Conditional orders allow you to automate both sides of your exit strategy within a single setup.
Planning your exit is a critical part of due diligence. A solid exit strategy helps control emotions, limit downside, and lock in profits. When you know exactly how and when to get out, your trading becomes more consistent and far more disciplined.
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