Segment 1: Understanding Options w/ Michael Sincere SEGMENT BEGINS AT 04:40 In this exciting, highly illuminating segment, economist/investor Jerry Robinson is joined by someone he has long admired. Best-selling author, MarketWatch columnist, and freelance writer...
KNOW YOUR EXIT BEFORE YOU ENTER
CHART: Why Every Trader Needs an Exit Strategy
Over the years, I have learned never to invest a single dollar into any stock or ETF until I have developed an exit strategy.
What do I mean by an exit strategy?
I am referring to your own personal threshold for economic pain. How much are you really willing to lose on one investment? Years ago, when I was a brand new trader, I would recklessly plow much of my capital into a stock with little to no exit strategy. Many times I lucked out and the stock went up. But at other times, the stock dropped like a rock.
Back in those early days, I could not stomach the thought of losing so much money so quickly to the market. I would often think to myself: “I will just hold on to this stock, even though it is a dog, because eventually it will go up.” Then after a few days, I would finally sell the stock and take a big hit. Then, lo and behold, soon after selling my stock, it would begin to start climbing higher. Talk about frustrating!
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If that has ever been your attitude towards an investment, you probably entered it without a proper exit strategy. So many people lose their shirts in the markets each year because their own pride will not allow them to sell something that they know they should. For me, experience was the best teacher. After losing big a few times, I quickly realized that “losing money” was much more painful than simply “being wrong” about a stock every now and then. After all, as John Maynard Keynes once quipped, “The market can stay irrational longer than you can stay solvent.”
In today’s chart above, note the three main types of stock trading exit strategies. Over the next three Tuesdays, I will detail each of these strategies and describe situations in which you can use each one.
Until next time,
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