How to create the perfect exit strategy

Julie Brownlee, Fsp Invest, 28 May. 2014

Tags: exit strategy, investing, investing strategy, trailing stop loss, trailing stop, profits, losses,

When you buy shares, before you even commit, you should have an exit plan in place. This removes any emotions out of your decision making. And ultimately will make you a more successful investor in the long run. So what’s the best exit strategy to use? Read on to find out…

A trailing stop loss is an ideal exit strategy

A trailing stop loss makes a great exit strategy. You might think that a trailing stop loss is purely for protecting your investment from the down side, but it works great on the way higher too.

To use a trailing stop to the best of its potential when your share is into profit territory, simply tighten it up so you capture the best profit you can.

If you opt to use a trailing stop loss, you need to decide on what stop loss level to use, Sid Riggs in Money Morning US explains. And you need to think about how much you’ll tighten it too if an investment goes your way.

It all comes down to the amount of risk you’re comfortable with.

Tighten your stop loss as your profits rise

You could go with a trailing stop loss strategy like this…
  • Start with a 25% trailing stop loss.
  • Once the share price rises to 30%, tighten your stop to 19%. This means your stop loss is 5% over the price you bought in at.
  • Once the share price rises to 40%, tighten your stop to 15%.
  • Once the share price rises to 50%, tighten your stop to 12.5%

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This strategy means that as soon as your investment starts to perform, you’re quickly going to be in a position to benefit from that. And tightening your stop loss as your profit rises is a great way to squeeze as much profit out of your investment as possible.

Of course, once you start tightening up your stop loss you increase the chance of being stopped out your investment. But offsetting this downside of the strategy is the reduced chance of losing money.

So there you have it, how to create the perfect exit strategy.

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