Effective day trading exit strategies

Spark Global Limited Reports:

Making a profit on day trading is not easy.

You need to get your timing, execution and exit right, or you will lose money by paying bid/asking spreads and commissions.

In the trading book, most of the focus is on your entry price.

Should you enter the market on a pullback, waiting for moving averages to cross, indicator readings, etc? But people pay little attention to your exit point, which is arguably more important in day trading.

The dynamics of day trading are so different from volatility trading. Many volatility traders are aware of returns due to the overnight gap. Day traders don’t see these differences, making their gains and losses more linear than swing traders.

Key corporate announcements are often made before the market opens or after the close, reducing intraday price shocks but also reducing the opportunities offered by volatility.

Know your style
It’s important to determine your strategy.

If this is a trend strategy, what are your goals? Do you want to take a lot of small losses for a big win, or do you want a more consistent strategy with a winning rate closer to 50 percent?

Can you handle the unwind and see it run for the rest of the day, knowing that if you continue to trade, you will get 10x the initial risk on the trade?

This decision must take into account your strategy. Some Settings, such as shorting intraday high large-cap stocks, tend not to look for big profit targets. Either play your card or draw a new one.

A common difference is that mean reversion traders look for smaller targets, while trend traders look for larger targets.

Know your market
You should understand the long-term trend of your asset class.

Is it a long-term trend, like interest rates, or a short-term trend, like commodities? Does it mean a return like stocks?

These types of insights should drive your strategy to some extent. After all, if you try to apply the mean-reversion strategy developed for stocks to the bond market, you probably won’t have much fun.

Know your trading day
When staring at 1-minute charts, it’s crucial not to forget the broader market context.

Narrow it down and consider where the stock fits within the time frame of each day. Are we in or out of yesterday’s range? Did the stock see any significant reaction after testing the previous day’s highs and lows? Has the fluctuation changed? What is a stock index?

Most day traders do not use a strategy statically, but adapt to the market of the day. If you trade a stock on a “trend day,” you won’t have fun.

Set profit goals: Pay yourself
Obviously, no trader is perfect.

Traders tend to fall victim to one of two exit problems: staying too long or getting out too early.

Reducing some of your positions into medium-term earnings targets can address some of the guilt you feel about locking in profits too early or letting nice gains turn into losses.

It’s a simple but very powerful concept. The size of your position is really up to you and can vary depending on your beliefs about the trading setup.

Let’s assume that you are a day trend trader.

You bought a bull flag. It’s in your favor. You’ve been here before, and many times the market will turn and stop you from exiting. Perhaps exiting a 30% position at the trend’s recent high would relieve some of the pressure.

You’ve paid yourself a little, and if the market turns, you can break even or make a little money. Once you’ve built some positions, it’s easier to make a profit once the stock hits a new intraday high.

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