3 effective exit strategies for day trading

Aug 31, 2022

Level: Experienced

Reading time: 4 min

One of the challenges of day trading is to close a position with a return. Day trades are set for the short term and on highly volatile markets. Intraday traders have to determine exit points in advance. Otherwise, they risk closing a position with a considerable loss.

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According to statistics, 75% of traders quit trading within two years because they aren’t satisfied with the results. To succeed, you need to learn and practice. Below, you will find trading strategies that will help you improve your skills.

What are the exit strategies?

An exit strategy is a method that allows one to close a position with a return or at least with a minimum loss. It includes two points — take-profit if your forecast is correct and stop loss if your forecast is wrong. The exit strategy helps traders identify particular points where a price may reverse.

Exit strategies follow standard rules that were developed based on historical price movements. Still, they can be customized according to market conditions, the amount traded, and a trader’s experience.

Best exit strategies for day trading

Every good exit strategy should provide two scenarios — for returns and losses.

Risk/reward ratio

Any trader knows the risk/reward ratio rule. Every trading tutorial includes this money management tool. In case you don’t remember: your potential reward should be at least two times larger than a potential loss.

Engulfing Candlestick Pattern

This means that if you place a take-profit level $40 away from an entry point, your stop-loss level should be $20 away from the entry point. The larger the ratio is, the safer for you, especially if you are a newbie trader. According to this strategy, you should identify a take-profit level first. After that, you can count the distance to a stop-loss point.

To determine the take-profit point, you can use different indicators, technical tools as well as candlestick and chart patterns. The most common approach is support and resistance levels.

Support and resistance levels are used for both entry and exit strategies for day trading. These are the points where the price will more likely reverse. The levels can be placed based on previous highs and lows and indicators, including moving averages and Bollinger bands.

Patterns

The easiest way to determine stop-loss and take-profit orders is to find a chart pattern. Chart patterns work best on short- and medium-term timeframes. That’s why they are perfect for the exit strategy.

Every pattern includes specific rules that identify how far the price may go if the pattern works. For instance, if you see a Head-and-Shoulders pattern forming, you can enter the trade when the price falls below the neckline after the second shoulder appears.

A take-profit target will be placed at a distance equal to the distance between the head and the neckline. A stop-loss order should be set at half the distance between the second shoulder and the neckline or at the second shoulder. It will depend on the degree of price volatility.

If the price forms long shadows, you risk exiting the market early, placing the stop-loss order in the middle of the second shoulder.

Other chart patterns work similarly. However, you should learn each separately and practice using charts with different assets.

Usual price movements

This is the most time-consuming approach among the day trading exit strategies listed. Historical data tells a lot about future price movements. If you trade within a day, you can simply check how the price behaved in the previous days.

Calculate the average distance the price moves within a day. Find the most volatile periods and measure how far the price may go during them. Record your calculations. After calculating the average price movements, you can identify how far the price may go and what the best period is for trading. Implement the risk/reward ratio rule to determine the stop-loss point.

Be careful. Fundamental factors will be crucial for this strategy. Intraday price movements depend on the news. Its direction and volatility degree will differ in vital economic and political events. For instance, if you plan to trade on a usual day, you shouldn’t consider price fluctuations after the US CPI release.

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Summing up

Newbies and professional traders can implement these three exit strategies. However, you should remember that every strategy should be customized regarding the asset you trade, the timeframe you use, fundamental factors that can drive the price, and the amount of funds you have. Always examine the strategies on a demo account or historical price movements.

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