Despite talking about it continuously, I find that many option traders still fail to set an exit point before they enter a trade. Though this doesn’t seem to be a big deal initially, those who have gotten into a trade and then didn’t know what to do understand how important an exit strategy can be. The major problem with trading is emotion, which can turn a good trade into a bad one or a bad one into a worse one.

When I first started trading, I remember struggling with each tick of a stock. I acted like a day trader, though my trades were set up for longer time frames. With each tick, I would change my thinking about what to do. I realized rather quickly that this emotional rollercoaster ride was not what worked best. So, if we want to take the emotion out of our trading, we need to know what we are going to do before we ever enter a trade.

At first, getting out of a losing trade at your preset exit will be very tough, but if you follow your plan, you will definitely benefit in the long run. Not only should we have a profit exit point, but also a losing exit point. When a trade goes bad, we often tell ourselves that the stock will come back and that we’ll hold on until we break even. However, more times than not, the stock continues to go against us, ultimately leaving us with worthless trades. At the same time, an option trade might see a nice profit, but if we don’t set an exit price, we’ll let our emotions keep us in the trade, often turning a profit into a loss.

Finding the appropriate exit points is a task in and of itself. Depending on the strategy and our own risk tolerance, our exit prices will be different. The key is to set consistent exit points that allow for long-term gains while cutting losses short. If the trade you are looking at doesn’t fit into your reward to risk goals, then look for a different trade. Setting an exit doesn’t mean we can’t let our profits ride either. For example, if you buy 10 contracts, you could sell half when the trade doubles in value, keeping 5 contracts alive for larger profits.

Overall, setting exit points is vitally important to your trading success. However, it is up to each of us to find the risk we are willing to accept and to set exit strategies appropriately. For those of you that have purchased any of the publications, learn from the exit strategies that are set for these trades.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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