When a trade entered goes as planned, the next step is to exit the trade.
If you are following a trend following method such as crossing moving
averages, MACD signals, or Momentum, these indicators will also be you
trigger to exit.
Many methods will keep you in a stock either long or short. Other methods
will use one or more indicators just for exit, and another for entry.
Sometimes we do not discuss the exit as much as we should.
We know when we should exit if a trade goes bad, but how about the trade
that works out well. Usually, most people will use the same indicator or
pattern that initiated the set up to enter the trade.
For example, a MACD Buy would wait for a MACD Sell. A moving average
crossover, would wait for the averages to cross back.
It is certainly fine to use trailing stops or a different pattern or
indicator for exit.
The key here is to plan on closing a winning trade.
Let's look at our chart below on Brocade
Communications (NASDAQ: BRCD). An exit strategy using the MACD
indicator.
On July 7, 2000, there was a very good MACD Buy signal on BRCD.
Late today, BRCD flashed a MACD Sell or Exit signal.
When a stock gets overbought, the MACD can signal the turn nicely, just as
it did on entry.
MACD is starting to turn from a very extended overbought condition.
If BRCD opens down, I would exit any longs in BRCD.
You should have your software set with the MACD indicator and when the
histogram drops below the signal line exit the trade.
A trader would have locked in a nice profit. An aggressive trader would
also reverse and go short at this time.
On a Short, I would place a stop at 198.
