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Exit Plan/Strategy for Stock Trades & Other Investments in 2012
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In 2008 I worked briefly for a stock trading company in New York. When we, the beginners, first came to the company, the owner asked each
one of us what was our experience in trading, what we traded and what was our "exit plan". Out of 20-something people, most of whom had years
of trading experience, only one person, a quiet Asian girl, gave a clear answer for Exit Plan question. She said that she would tolerate a loss of up to 5% and
then exit the trade. At this point the owner said something I would never forget. He said that in the last two years of hiring people, she was
the first person to give clear answer to the Exit Plan question.
So what is an Exit Plan for your investments? It is a plan you create before you purchase an investment of how much loss your are willing to
take and what profit will satisfy you. The profit part is easy: you simply decide that after your investment will go up let's say 20% you will sell it, take a profit and look for new
opportunities. This is usually easy to do. The pitfall is that some become greedy, and when investment reaches 20% goal they decide to let
it run further. This decision could go either way. More often than not the stock turns back down and the person starts beating himself down
for not sticking with a plan.
The more important part of your Exit Plan is what to do when investment starts to go down. Simply put: when it does not go where it was supposed
to go, it is the time to sell. You have to set a firm number, let's say 1%, 2% or 5% of loss that you are willing to take. And stick with it. No matter what.
Let's break down how the Exit Plan would work. Let's say you want to buy Apple for $300. You create your Exit Plan: when my investment
appreciates 10% (goes up to $330), I will take a profit. If my investment goes down 5% (or $15) to $285, I will take a loss. With this plan
you could be wrong twice as often as your are right, and you will still break even!
The problem with why most people can't stick with their Exit Plans is their own emotions. Psychologically people REALLY HATE taking a loss.
When investment starts going down, emotions take over, people start saying things like "But I'm right!", "But this is Apple - it will go
back up" or something similar. This is the surest way to loose everything.
Fortunately there is a way to deal with this problem - automate your Exit Plan. By this we mean that after your order of purchasing Apple at $300 is
executed you enter two more orders. First, is the limit order to sell Apple at $330. The other is a stop order (stop-market order) of selling
Apple at $285. That's it. Never, never modify or cancel these orders.
Having an Exit Plan for your investments is essential in today's stock market environment. If you stick to it - you will likely be successful. If you don't - you
will most likely loose a lot of money. It's that simple.
Related article: Top online brokers in 2012
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