If you’ve been trading for more than a few months, you’ve probably asked yourself this question: “What’s the best way to exit a trade?” It seems simple on the surface, but many traders, myself included, have spent countless hours pondering the perfect exit strategy. The idea of when and how to exit a position can have a significant impact on your overall trading success. In this article, we will explore why traders ask this question, the common exit strategies, and why selling your entire position might be the best approach.
Why Do Traders Ask The Question?
As traders, our ultimate goal is to make money. Active trading is not just about making profits; it’s about maximizing the amount of profit per trade. However, in practice, many of us have had periods where we were simply making our brokers rich, putting on losing trades after losing trades. These frustrating stretches force us to reevaluate our strategies, especially our exit strategies.
But why do we obsess over exits? The answer lies in the unpredictable nature of the markets. No one knows how far a stock will go, no matter what strategy, technical indicators, or market theory you use—whether it’s Fibonacci retracements, Elliott Wave Theory, or the most sophisticated algorithm. The market’s future direction is ultimately unknowable.
This inherent uncertainty means that many traders find themselves looking back at trades that could have yielded more profit had they held on a little longer. The pain of leaving money on the table is only second to the pain of an actual loss. This is why traders are constantly searching for the best exit strategy—because it can make the difference between success and frustration in the trading game.
How Do We Turn a Profit?
At its core, trading is about turning a profit. To realize a profit, a trader must close their position, whether it’s selling a long trade or buying back a short. Yet, the challenge lies in determining the best time to do so. Every exit strategy comes with its own risks and rewards, and many traders find themselves torn between playing it safe and aiming for larger gains.
Since predicting market movements with precision is impossible, traders often look back and see that a stock moved further in their favor after they exited. This regret is a psychological challenge that all traders must face. It leads us to explore strategies that can help maximize our gains while minimizing our risk.
Common Exit Strategies: Halves, Thirds, and By Touch
Once traders recognize that there’s often more money left on the table, they start experimenting with various exit strategies. One popular method is to sell half of your position after a stock makes an initial move in your favor. You then hold onto the second half, hoping for an even larger move.
This approach seems logical on the surface. By selling half, you lock in some profit, reducing risk while still allowing for further gains on the remaining position. Psychologically, this can help traders feel more comfortable as they navigate the stock’s movements, knowing that they have already secured a partial win.
However, in practice, this strategy often doesn’t work as well as it sounds. Here’s why:
- Losing the Risk-to-Reward Battle: While you may lock in small profits by selling half, your losses on full positions can outweigh those gains. Over time, this weakens your risk-to-reward ratio, making it harder to turn a meaningful profit.
- Psychological Impact: You may find yourself feeling frustrated as your winners seem small compared to your losers. Even when your trades end in profit, the gains may feel insignificant, leading to a cycle where you’re constantly chasing bigger wins but rarely achieving them.
The Reality of Day Trading: No Time to Relax
When you’re day trading, there’s no time to “get comfortable” with a position. The market moves quickly, and if you’re holding on to part of a position in the hopes of catching a larger move, you run the risk of watching your gains disappear in an instant. Volatile stocks can drop 3% or more within minutes, turning a winning trade into a losing one before you can react.
Another variation of the partial exit strategy is the “thirds” approach. In this method, you sell one-third of your position on each favorable price spike, attempting to ride the trend throughout the day. However, studies show that stocks only trend in one direction for an entire day about 20% of the time. This means that in the majority of trading sessions, stocks experience back-and-forth movements. Holding on for a full day might sound appealing, but it’s often not the most effective strategy.
As traders experiment with different exit strategies, many eventually land on the “by touch” method. This approach involves selling a portion of your position based on how you feel about the stock’s performance. If a stock is doing well, you might sell in quarters; if it feels risky, you might sell in halves.
While this strategy offers flexibility, it lacks consistency. Trading decisions based on emotions or gut feelings can lead to erratic results. The markets require a disciplined, methodical approach, and relying on “feelings” can cause traders to deviate from their plans and make costly mistakes.
The Case for Selling Your Entire Position
So, where does this leave us? After testing various exit strategies, many traders come to the conclusion that the most effective method is to sell their entire position at once. Here’s why:
- Maximizing Consistent Profits: In my own experience, I have made the most consistent profits by selling my entire position as soon as I feel the trade is either going too well or starting to go wrong. This approach allows me to lock in my gains without worrying about what might have been.
- Eliminating Emotional Distractions: Holding on to part of a position can create unnecessary mental distractions. As day traders, we need to maintain an intense level of focus throughout the trading session. Having part of a position “floating” while you’re opening new trades can create stress and detract from your ability to make sound decisions.
- Living in the Moment: Day trading requires us to focus on the present, not what the market might do later. The goal is to capture the greatest profit potential at that moment in time, not over the course of the entire day. By selling the full position, traders can take advantage of the immediate opportunity and move on to the next one.
The Psychological Benefits of Selling It All
One often overlooked aspect of trading is the mental toll it can take on us. Holding on to part of a position can lead to what I call “mental slippage.” You might be net up on the trade, but if the second portion of your position ends up being sold at a lower price than the first, it can still feel like a loss. Traders tend to remember the pain of the second half rather than the success of the first half.
Selling your entire position at once helps eliminate this psychological trap. It gets you into the rhythm of winning, which is crucial for maintaining a positive mindset. The more you win, the more confident and focused you become, which in turn leads to better trading decisions.
Don’t Follow the Crowd Blindly
After reading this, you might be tempted to go back to watching videos or reading posts that advocate selling portions of your position. While these methods can work for some traders, I encourage you to consider whether they truly fit your trading style. Just because everyone else is doing something doesn’t mean it’s the best strategy for you.
It’s okay to feel uncomfortable with holding part of your position. Trading is highly personal, and the strategies that work for one trader may not work for another. Don’t be afraid to challenge conventional wisdom and find the approach that works best for you.
Putting It All Together
Ultimately, you need to determine which exit strategy puts the most money in your pocket. Through thousands of trades in both simulated and live accounts, I’ve found that selling my entire position consistently yields the best results. Not only does it help me maximize my profits, but it also eliminates the psychological strain of second-guessing my decisions.
If you’re struggling with exit strategies, consider trying this approach. Keep track of your trades and analyze the results. Over time, you might find that selling your entire position leads to greater consistency, higher profits, and a more enjoyable trading experience.
In Summary
Exiting trades is a crucial part of the trading process, and there is no one-size-fits-all approach. However, for active day traders who specialize in breakouts, selling the entire position at once can provide several benefits. It maximizes profits, eliminates emotional distractions, and helps traders maintain the focus needed to succeed in the fast-paced world of day trading.
Experiment with different strategies, but always remember that consistency is key. If you find yourself constantly second-guessing your decisions or feeling frustrated with partial exits, it might be time to simplify your approach and sell it all.