Welcome to what’s sure to be another rollercoaster week in the stock market.
Stocks ended last week on a high note, with the S&P 500 ETF Trust (NYSEARCA: SPY) soaring into the close to print a +1.5% green day.
Short covering, put-squeezing, and selling exhaustion all contributed to this impressive Friday afternoon rally.
It definitely feels like the market is trying to bottom, and I couldn’t resist making a small bet in that direction…
So, I bought some Microsoft Corp. (NASDAQ: MSFT) 11/11/2022 $220 calls right before the close on Friday. I did this because the stock finally put in a first green day, and I’m betting on some continuation this week.
That said, if the price action in the market doesn’t play into my trade, I’ll cut the entire position immediately.
And this brings me to what I’d like to discuss today — the importance of having an entry and exit plan for every trade.
Setups rarely play out exactly as predicted. Even if you’re correct overall, there are often unpredictable bounces or dips that you have to contend with.
That’s why it’s crucial to have a plan for when (and how) you’ll enter and exit the trade.
Keep reading and I’ll show you how to do this like a pro…
Plan Your Trades Ahead of Time
I plan every trade I execute ahead of time — and I upload them all to Profit.ly.
How do I plan?
I make notes about where I expect the stock to go and where I’ll sell if I’m wrong.
Most of the time, if the stock doesn’t start doing what I expect immediately, I cut the trade entirely.
This discipline has kept me from ever experiencing a big drawdown in my account. (Take a look at my profit chart if you don’t believe me!)
Are you familiar with this trading “loophole?”
Are you familiar with the “loophole” that helps small accounts grow exponentially?
No, it doesn’t have anything to do with penny stocks or crypto…
And this strategy works regardless of whether the markets are up OR down…
This little-known options “loophole” is something you can use to grow your trading account right now…
You can always get back into a trade if you’re wrong the first time. But if you let a bad play get out of control, it could be disastrous for your account.
Luckily, there’s a way to prevent this from happening — form a trading game plan before you make any trades.
And two crucial components of any plan are solid entry and exit strategies…
You should never buy contracts without carefully considering your entry point…
But I see many inexperienced traders make this mistake.
They’ll get trigger-happy and buy contracts immediately, then realize they could’ve purchased at a lower price had they just been a little more patient.
Here are some important factors to take into account when entering options trades:
- If you’re thinking about buying puts, consider whether there’s a major support level near the current share price. If there is, you may wanna wait to see the stock lose that level before buying puts.
- The inverse is true if you’re buying calls. Check to see if there’s a level of strong overhead resistance to worry about, and if so, wait for the stock to crack that level before buying the calls.
- Watch the price of contracts throughout the day, noting their high and low points. This will give you an accurate gauge of the range the premiums are trading within. That way, you don’t have to guess what a good fill is … you’ll know you’re buying near the low of the day.
How you exit trades is arguably even more important than how you enter them…
After all, exits are where you make (or break) the bank.
With that in mind, here are some pieces of wisdom I’ve acquired over the years about exiting trades successfully:
- Always have a price target where you plan to exit. I like to have a target for the share price as well as for the options premium. For example, I’ll write in my trading journal “I’m aiming for Stock XYZ to hit $95, or to hold the contracts I’m trading from $1.20 to $2.50ish.”
- If you’re worried about your timing, or being able to pay attention to the market for the entire trading day, don’t hesitate to set a limit sell order. You can even do this as soon as you put the trade on. That way, you can make sure your contracts get sold if you hit your price target.
- If you’re up 100% on an options trade, you should probably just sell the entire position. But if you see more upside on the chart, you can sell half of your position to make the remainder of the trade risk-free. From there, you’re ‘playing with house money.’ This can make the second half of the trade — and your ultimate exit — much less stressful.
Having solid entry and exit strategies takes a lot of stress out of trading.
Work on developing very specific plans for how you’ll get in and out of your trades moving forward.
Doing so will help you improve your execution, your timing, and your confidence.