When I first started taking trading seriously about ten years ago, I found the stock market to be fun and exciting…
… that is until I found out how fast and easy it was to LOSE money.
For the first two years of my trading journey, I was gathering data about myself, experimenting with strategies, and learning how to manage risk.
My breakthrough moment occurred when I started blocking out the noise and put more of an emphasis on execution and risk control.
(I never trade alone and you shouldn’t either. If slow, steady, and consistent is what you want from your trading, then click here to watch my latest training)
After all, as much as we want the stock we buy to go up in price, there is no assurance that it will happen, and because of that, a trading plan must be put in place, so we know when to take profits or cut losses.
Most importantly, it has to make sense. If you keep getting stopped out or are having a hard time reaching your targets, then maybe you need to readjust your plan.
That said, you don’t have to be a NASA engineer to be able to set targets and stops that work. In fact, I’ve devised a pretty simple method that works (over $2.6M in career trading profits) that I’d like to teach you right now.
One thing that a lot of traders have a hard time is knowing when to get out of a stock…
… and typically when they don’t know where their exits are…
… they end up turning a winner into a loser… or worse, taking a massive loss.
You see, beginners like to focus on entries, and you often hear them say things like Where should I get into a stock, thinking they’ll buy it and it’ll go up… and take profits whenever they see fit.
Well, it doesn’t work that way.
When you don’t focus on your exit plan… things can get wrong really quick… and you end up panicking and getting stressed out.
Well, there’s one simple way to avoid getting stressed out, panicking in the heat of the moment, and taking massive losses: plan your trades.
For the most part, I like to use charts for both my entries and exits… and I write a clear trading plan out that I send out to clients.
For example, here’s a look at one of those trading plans.
Now, let’s say you bought this stock at $134.50, right in the buy zone.
Here’s a look at the chart in Caterpillar (CAT).
Now, if you plan your trade… you know right off the bat where you’ll stop out and take profits (the prices in my trade plan are based on my easy-to-use patterns).
In addition to using charts to signal when and where I should stop out of a trade… I also use my golden rule: Never risk more than 2% of your account on any trade.
Well, I came to the conclusion to stop out of this position, if you got long, at $133.09.
Additionally, I found that the first target should be at $137.41 and the second target all the way up at $143.29.
Once you have these bits of information… things get a lot easier.
You Can “Set it, and Forget it”
Now, you can’t really forget about your trades… but you can actually set your stop losses ahead of time.
For example, let’s say you’re long 500 shares of CAT at $134.50…
… you can set your stop-loss order ahead of time. In other words, if the stock moves against you… you don’t have to worry about whether you should double down or hold onto the stock.
Here’s a look at how you would enter that order (keep in mind we’re using TD Ameritrade’s thinkorswim platform for example purposes).
This is what’s known as a sell stop order. In other words, when it reaches a certain price, you’ll sell the specified number of shares.
More specifically, this is known as a good til’ canceled sell stop-limit order… it sounds complex, but it’s really not.
Good til’ canceled simply means the order will be live unless you cancel it or it is executed, and depending on your broker… that order will cancel if you take profits on your position.
Now, with this order type, it allows you to be more specific. There are two components to this stop-loss order. The stop price is where your limit order will be triggered. In other words, in the order above, you’ll notice there is a stop price at $133.50.
Basically, if CAT falls to $133.50… your order to sell your shares becomes live. The limit order price is set at $133.09. So if the stock gets to the limit price, you would sell your shares and take the loss.
This helps a great deal to manage your risk.
On the other hand, what happens if the stock goes up and gets to your target?
Well, you would place a limit order to sell a specified number of shares, let’s use 250 shares here.
Here’s how the order would look.
This is known as a sell limit order. With this example, you set the shares at 250 (half of your position) and a limit price at $137.41.
Now, you can mark these orders as DAY or Good Til’ Canceled (GTC) orders. If you enter the limit order as a DAY order… that means after 4:00 PM EST, that order would cancel… and you would need to re-enter that order the next day.
Let’s see how that trade would’ve turned out.
Now the stock actually got to the first target… so you would’ve sold 250 shares.
Once you’ve sold those shares, you can actually move the stop higher after to protect your profits. For example, you could move the stop-limit order to your entry… or higher, whichever you feel most comfortable with.
That said, the next time you get into a trade… make sure to have a clear and concise plan… and to have exit orders in place so you don’t let emotions ruin a potentially good trade. Now, if you’re struggling with finding plays and developing trading plans… need someone to hold your hand as your learning how to trade stocks and ETFs, then click here to get started.