Exist Trade

First, knowing your targets and stops allows you to weigh rewards and risks. If you have a clear signal to buy, with a price target of $2 above and a stop $4 below, is that trade worth taking? Do you want to risk $4 to gain $2? Price targets and stops prompt you to focus only on trades whose potential rewards far outweigh the risks. The ability to walk away from a potential trade is as important as the ability to decline a drink when you want.
Second, setting profit targets and stops before entering trades helps sidestep the pernicious “ownership effect.” We get attached to things we own and lose objectivity. That old ratty jacket hanging in your closet should have been given to the Salvation Army years ago. That trade you entered last week is starting to come apart at the seams. Why don’t you chuck it? You own both the jacket and the trade; they feel comfortable, familiar. That’s why you need to decide on exits before you enter, before a trade becomes yours.

What if you’re planning a fairly long-term trade that may last for several days or even weeks? Profit targets shift with the passage of time, and protective stops need to be tightened as the trade moves in your favor. You must write down your rules for exiting trades and follow them from that piece of paper without arguing, haggling, or hoping for a better price. For example, you may decide to exit if the upper channel line gets hit or if the market makes lower lows for two days in a row. Whatever rules you use, write them down and execute immediately once the market hits a profit target or a stop-loss level in accordance with your rules. Very experienced traders know how to recognize unusually forceful trends, during which they shift exit strategies, take partial profits, and carry the balance of their positions with a modified exit strategy for runaway trends. As you become more experienced, you can become a little more relaxed with your plans, but a beginning or an intermediate trader must be very strict. Entries are easy because any clown can buy a lottery ticket, but exits separate winners from losers.