Entering and exiting stock or option trades is a lot like learning how to take off and land a small airplane. The most dangerous times when flying a small aircraft are not once you get up to altitude but as you take off and when you go to land. At both times even small mistakes for example, forgetting to adjust your flashes, maintaining the appropriate airspeed, ascending and descending at the correct angle, and banking properly are just part of the many things a new student pilot needs to remember to take off safely and To land safely.
Both new and veteran traders must also be keenly aware of very similar conditions when entering or exiting a stock. Exiting a trade is often a place where emotions are running high, even for a savvy veteran trader of 20+ years. If profits are soaring, the euphoria that sets in can make it harder to really see the price action and what is going on.
Greed may take over and the desire to get just a little more profit may end up being the decision that wipes out, all of the gains of the past few days for swing traders or minutes for day traders. For Position Traders, entries and exits are far more forgiving and the gains are significantly higher. Risk is lower and entries and exits do not require the precision of a swing or day trade. So this lesson is mostly for swing traders.
What you need to remember most about exiting a swing trade is that once you are in profit use trailing profit stops, based on the technical and financial support levels on the chart. Fundamental support always is stronger than pure technical support. The next thing you need to determine is whether the run is momentum or velocity. This makes a huge difference in where to place the trailing profit stop.
When the run is momentum a trailing profit stop needs to be below the prior day's low or at a consolidation area, because sometimes the candles are constantly overlapping and the wicks and tails can be rather long and frequent. Often a momentum run is triggered by High Frequency Traders HFTs, and then chased by smaller funds and retail traders. Price can become too steep to sustain. The angle of ascent just like an airplane, can cause the stock to lose lift and at some point just like an airplane that goes up on take-off too steeply and stalls falling from the sky faster than it climbed, so will a stock that runs At a steep angle of ascent.
Many traders will feel greedy with increasing profits each day and will want to hold on hiring that the stock will run higher, but holding too long may be a high risk decision in terms of how much profit you keep as the stock falls due to profit taking .
Little weak indecision day candlesticks are a newer pattern that shows how large lots are controlling price, even as the smaller funds are buying speculatively. After HFTs momentum runs, the Giant lots sell very carefully so they do not disturb price much. However the stock will be losing energy aka volume so the run is exhausted, and at risk of a stall as profit taking will overwhelm the small lot buyers.
At this point an exit should be to simply exit the trade, but many traders will hold on rather than taking the profits with the larger lots. Traders often try to "get out at the top" of a run, rather than collecting their profits and moving on to a much lower risk trade. Learning to take profits early and moving on to the next trade is a skill that all traders need to learn.