Continuing our series on
Know your trade
, let's take a look at the exit strategy of your trade from
Many non-professional traders and investors sit at home in front
of the computer screens and panic when a trade moves against them
or get nervous about when to exit a winning trade.
It was the hardest emotion for me to overcome when I first
started out trading. I left an environment of a corporate office
where I could bounce ideas off people and seek advice; and
although I can bounce a ball off my dog's head, he's no help in
I quickly adopted a rule from my old corporate days, when I
would take a day off and leave someone else in charge: I'd say to
them any questions, "ask yourself what would Rich do?" It was
perfect back then and I still use the concept today.
Simply ask yourself "would I enter the trade here at current
levels?" It typically provides the smartest/safest decision every
Let's work through an example for illustration purposes.
In this example we sold a secured OTM
) May 13 Put at $0.85 two weeks ago when VIP was trading above
$13. Today the position has moved against us when VIP fell like
rock and the price is now trading below $11 a share placing the
PUTs ITM and selling for $1.85. That's -1.00 against the
Now ask yourself "would I enter this position here at current
market levels?" The answer is most likely NO! So close the
Let's reverse the example and say the price of VIP rockets up,
and the PUT options are far out of the money and are now valued
at $0.05. Ask yourself "would I sell these puts at the current
level at 0.05 cents?" The answer should be NO! Close the
position, take the money and run!
This is a great guide that can serve traders well, but it's
not a shortcut or excuse not to have a trading plan!