Learn with ETMarkets: Why are exits more vital than entries

When you buy a share, you are so full of optimism. You picture your stock rallying to new highs and becoming a multi-bagger. So entries are easier decisions to make. Exits, however, are an entirely different ballgame. When you exit a profitable position, you are always worried that the stock could still go up further and you might miss out on all the potential profits by exiting early. And, when it comes to exiting a position in a bid to limit losses it is as it is a stressful situation.

This being the case, you see more spoken and read about entries into stocks and less about exits. I find that most traders, even the more seasoned ones, often falter while choosing the best place to exit a stock. Exits, however, make or mar a trader. When to exit is the most important decision you make as a trader.

So, how would one know when a stock has run its course and one must exit before it is too late? While it remains a tough decision to exit and you will always regret not waiting another few days or not exiting when you had the chance to, you could do much better as a trader, if you laid down rules for determining the best place to exit. This rule-driven approach takes away a great deal of the anxiety you would otherwise experience if you didn’t have well established rules for taking profits or limiting losses.

While most people think exiting in time is nothing short of rocket science and use arcane indicators to help them time their departure, in my experience, I have found that the use of simple moving average carefully can give you the cue you need to dump the stock in your hands while there is time and maximise your return per trade over the long run.

I prefer using the 12-period simple moving average, for instance, on my monthly charts to time my exit out of long- term stock positions and this simple hack can guide you out of stock most often at the most optimum levels. Here’s a recent example to illustrate this point:

This is the monthly chart of or Naukri. See how the use of the 12 month simple moving average on this chart enabled us to exit the stock as soon as there was a breach of the average line thereby locking in profits. The 12-period average line functioned as a trailing stop loss while the price for the stock moved upwards there by locking in profits.

Using a simple technique for trailing stop-loss can improve your trading phenomenally. While you can improve your stop-loss mechanism as you discover newer and better ways to calibrate exits, the use of the good old moving average, too, can be very effective in most situations.

Whatever you do, decide beforehand how you will exit the trade you are about to enter, and see the change it brings about to your returns and risks.

(The author is Founder & CEO of Equityrush. He is a Sebi-registered Research Analyst and an acclaimed trader, trainer and Investor.)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)