Always plan your exit in advance

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We are aware of the fate of Abhimanyu in the Mahabharata. During the time when Arjuna and Subhadra's son Abhimanyu was in his mother’s womb, he began learning warfare. While Arjuna was explaining the techniques for entering and exiting the Chakravyuha, Subhadra fell asleep, so Abhimanyu learned how to enter the Chakravyuha but was unable to learn the exit strategy. He had to pay for that ignorance with his life later on.

It's unclear why he couldn't learn this knowledge from his father after birth. Those who delve deeply into the study of the Mahabharata may shed light on this issue.

In trading, this problem of exit is a major reason for our losses. Our trade entries are often correct, but exits do not happen properly, even though "Exit is much more important than entry" is a well-known saying in trading.

In many mid-cap and almost all small-cap stocks, after a steep rally, there is often distribution, leading to several months of no movement. If one fails to exit such stocks in time, they suffer. In these situations, buying at high prices while chasing momentum and averaging down when prices fall leads to uncertainty about when to exit. Here, not only is exit crucial, but entry timing is also questionable. If prices don't recover after averaging down, one might think, "The price will eventually rise," leading to stagnation. The issue is that capital gets tied up in losing trades, causing missed opportunities in profitable trades. Selecting the right stocks for trading is not particularly difficult, but it is essential; mastering this can help mitigate these issues.

Option buyers face the most significant challenges during trade exits. Due to the lure of "Limited loss, unlimited profit," if a trade goes against them, they often end up losing the entire amount.

There are two types of exits in trading: one is exiting at a loss, and the other is exiting at a profit. The latter is quite challenging to manage. In fact, losses can be categorized into small losses and large losses, while profits can also be classified into small profits and large profits. This topic warrants detailed discussion.

Remember, successful trading is a journey, not a destination. In the early stages of trading life in the stock market, one has to deal with small profits and large losses. As a result, capital can quickly deplete within a few days.

Those who wish to take trading seriously start to think about managing trades afterward. This is the first step in the journey to becoming a successful trader. It goes without saying that prior to this, one learns market analysis methods.

Now, it's time to focus on reducing losses. Regardless of whether the trade is right or wrong, one must cultivate the mindset of taking small losses and absolutely avoiding large losses.

Those who reach this stage have made significant progress toward becoming professional traders. They have moved past small profits and large losses to the next stage of small profits and small losses.

Now comes the final step in trade management: achieving small losses with large profits. Exiting trades with small losses is challenging but can be mastered. Many traders are skilled in this area, and it can be achieved at earlier stages.

While stop-loss orders can reduce losses, often only a fraction of the potential profit is actually realized. Maximizing profit is one of the toughest challenges in trading. Only a small number of traders can do this, and they are the true professional traders.

To increase profits, trailing stops are essential; changing stop-loss levels a couple of times can help secure profits. The 1:3 risk-reward ratio can be effective in some cases, but blindly following it can lead to issues. It’s undesirable for profits to turn into losses while aiming for a 3R profit. However, if one cannot accept the possibility of small profits leading to small losses, achieving larger profits becomes impossible. It's worth noting that while the definition of "more" profit varies among individuals, the amount of small losses should ideally be kept within 2-3 percent of capital.

To achieve substantial profits, significant market changes are necessary. Such opportunities arise only about four to five times a year. To anticipate substantial rises or falls, one must learn technical analysis thoroughly. Many traders possess that expertise; what is needed is trade planning.

In conclusion, if there is no robust trade exit strategy, one can refer to the accompanying image for a better understanding of the potential consequences.

#tradewiselylearncontinuously

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