Stock trading online is both an art and a science. Once you’ve learned to recognize a certain number of trading setups, you should know when to enter and exit those trades. If you don’t have a plan going into the trade, you’ll find yourself stumbling around the stock market, and eventually going broke.
Once you have that stock trading plan in place, you need to follow it. That’s not so easy sometimes. The strong force of emotions can play games in the stock traders head. This leads to two of the biggest challenges many traders face, yet fail to realize.
The first problem is totally failing to enter the trade. As an example, today the stock market was receiving news from the Federal Reserve on the Fed funds interest rate. The stock trader writing this knew that the market would react on that news. The news however, would not come out for another four hours. A stock trading set up formed, yet the online trader failed to execute the trade. The trade would have worked. Had the stock trader planned the execution of the trade ahead of time, there would have been no emotional bias. Not taking the trade in the first place leads to second guessing.
A second challenge facing many online traders, is exiting the trade too early. This can often occur when a stock reaches a nice profit, yet the trader doesn’t sell. He lets the stock dip back down, and then possibly lets the stock trade back up, or worse, the trader turns it into a loss. Before entering any trade, the stock trader should know where the exits will be. Your trading plan should include the stop loss and the profitable exit points. As an example, your exit strategy may include selling all of the trade at a certain price point. Preferably though, the stock trader will plan selling the stock in partial lots.
Let’s say you buy 300 shares of a stock. An exit strategy for the trade may include selling 1/3 of the lot, or 100 shares, at 1R. R is = to the risk taken. So if you had a stop loss of one point, R would equal 1, and you would sell the 100 shares at one point profit. The other 200 shares may be sold using a target approach or stop loss method. The main point here is that you, the stock trader, will be using technique to know when to sell, instead of exiting the stock based on emotions. A pilot doesn’t fly a plane without knowing where she’ll be landing does she? The risk and reward of the trade is defined.
When the stock trader is successful in pulling the trigger on his trades, he’ll soon realize larger profits. He takes defined trading setups, and exits those trades to their fullest potential possible, using a tested stock trading methodology.