Focus on Exit
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.
I believe that there is not enough focus on the exit of a trade. The exit
locks in profits or keeps losses small. The stop should take you out of a
trade with a small loss. The next question is "When to exit a profitable
trade?"
Let look at our chart below for Coca Cola Co. (NYSE: KO).
After a major decline in going back to June 99, KO reversed this downtrend
in early October and has started moving up again.
KO has had a series on channel consolidations and then has been breaking
out to the upside over the past couple of months.
The most recent breakout was on November 17 at the 59-price level and KO
moved up sharply to the 68 area.
Any of the indicators we watch each day in this column would have confirmed
the last move. It broke a 20 period channel high, moving averages crossed
up to a Buy, Momentum and OBV (On Balance Volume) all were confirming
higher prices.
There are many stocks with similar patterns. Some in the same sector such
as PEP.
As we look at the chart below, we see all of the indicators we use, warning
of a possible change in trend.
When does a trader exit KO?
The MACD has already issued a Sell signal. Momentum has turned down.
OBV has stopped increasing.
If KO drops in the first hour of trading Monday, it too will signal a Sell
signal.
A 20 period low will be broken on a down move Monday.
If KO drops below 65 � Monday, I would exit longs in KO. I do not
want to risk a major change in direction.
Only an aggressive trader would also consider a Short at 65 �.
Remember that the pattern has been to channel, and then move up. KO may go
into a channel and may not change directions. If a Short is entered, I
would place a tight stop at 68 /3/8.
