What is a good exit strategy to have before buying into a stock? e.g if the stock drops by 10, 20%? - Seedly

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Asked by Anonymous

Asked on 10 Mar 2019

What is a good exit strategy to have before buying into a stock? e.g if the stock drops by 10, 20%?

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Yeo Enk Loui
Yeo Enk Loui
Level 6. Master
Answered on 11 Mar 2019

Hi there!

If you are looking to trade stocks, a good gauge would be setting your percentage gain to be twice more than your percentage loss.

For example, I'm moderately bullish on Nvidia (NVDA) due to how they recently acquired Mellanox to boost its data centres (https://www.bloomberg.com/news/articles/2019-03-11/nvidia-to-buy-mellanox-for-6-9-billion-to-speed-datacenter-push)

To take a long (buy) position in NVDA, i may be looking at a gain in share price of 4% and if thats the case, I should set my stop-loss at 98% at the stock price that i bought NVDA at. (Hence I'll be losing 2% if somehow the share prices did not go according as planned).

If you were to do the math and assuming that you have a fair chance (50-50) chance of picking a winning/losing stock, following such a strategy will result in a net gain of 10%.

Of course, there are no such thing as guaranteed returns in investing and the actual trading of stocks require much more than just randomly setting an arbitrary take profit price/stop loss price. It requires usage of technical indicators as well!

If anything, this is to provide a cursory glance at the basic idea that you could adopt in trading stocks, so you won't have to deal with the mental trauma and anxiety of watching your share prices tank 10% - 20%

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You exit high, not low. In fact, if you're investing for the long term and the fundamentals of the company doesn't change, you should be buying more when it's down 10 or 20%.

You should have take profit scenarios instead.

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