Once you identify a high-probability trade setup, enter the trade with an automatic exit plan to overcome powerful effects of the emotions of GREEN and FEAR, which trouble even seasoned investors and traders.
Initiate a High-Probability Trade with an Automatic Exit plan
The next critical step to ensure a high likelihood of you making money is to enter a high-probability trade with an automatic exit plan. If we are scanning our stock watchlist after the market has closed for the day, we need to wait until the next day to enter the trade – but, only if the stock continues to move in the direction we wish. If we are scanning while the market is open, we could enter our high-probability trade immediately when the lagging indicator confirms that the stock is moving in the direction we wish. Which High-Probability Trade we enter depends on how much money we wish to allocate to a given trade (read more about this in ‘The Stock Market Game’) and what is the risk-reward ratio of different high-probability trades we found. Obviously, we prefer to enter trades with the greatest possible reward to the risk in the trade.
Despite having entered into a High-Probability trade, one should always have an ‘exit strategy’ perchance the stock does not continue to move in the direction you wish. This can happen for a variety of reasons including adverse general market conditions, news of war overseas, one of the competitors of the company you invested in going bankrupt, etc. No matter what the reason, one has to be prepared to exit if one is losing money. This is often very difficult for newbie traders as it means admitting that ‘one was wrong’ – the seasoned traders accepts such losses as an inevitable part of playing ‘the stock market game‘ (such losses may also be regarded as‘the cost of doing business’). If investors and traders could learn to accept such losses and ‘move on’ when the trade goes against them, they would ultimately be both wiser and richer. Unfortunately, it is difficult for even seasoned investors and traders not to get ‘attached to their investments’ – such is the power of both GREED and FEAR. See ‘How to Trade‘.
One great way to prevent GREED and FEAR sabotaging your trading is to use an automatic exit strategy. When you enter into a trade, place a GTC (good till cancelled) order to close the trade when your predetermined targets have been triggered. Nowadays, with automated order entry, one can set GTC orders to exit for both profit and loss. For example, if you set a GTC OCO (one cancels other) order to close the trade at a 20% profit or a 10% loss, you automatically ensure that GREED and FEAR do not prevent you from staying in the trade too long. By using a strategy of only placing high-probability trades and using automatic exits to exit for a greater profit than loss, you have a winning combination. Some brokers have great online resources including ‘how to’ guides and videos to help their clients learn how to use this modern technology to their advantage. IF you always profit more than you lose, then even if only half the number of trades you place are winners, you still come out ahead!
For a simple 3-step method (with illustrations) of how to increase your chances of maximal profit with an automatic exit when the market moves in your favor, see ‘How to Trade Stock Options‘ and ‘How to Trade Stock Options Pictorial Guide’.