“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.” - George Soros
The ace investor and trader George Soros has summarized in simple word that get out of a trade when you are wrong but it is the most difficult thing to do then said. If you are investing or trading in the stock market from a very long time or just started recently, most of people will agree with me that they found themselves in a great difficulty to get out of an investment/trade when it has gone wrong for them. The simplest reason for is that we all put a trade or investment after doing loy of our homework and believes that it cant go wrong and when it happens, it is very hard for one to convince himself that he is proven wrong as per his hypothesis so he should be exiting the trade. But we keep holding our position in the misplaced hope that it would bounce back one fine day. On the other hand when a stock goes into the same direction what we had thought that it would go, most of the time we are unable to lock the maximum profit because we do not know where we should be exiting the trade. And one fine day we get out of the trade in a haste because of greed or fear than a proper exit plan.
But exiting a trade is a very painful exercise. We all day in day out try to find out a holy grail system for stock market which will tell us what stock we should buy at what time and what price. But we never get bothered about thinking what we will do if stock is behaving as we had expected or it is going against us. Because of unavailability of any exit plan at many time we allowed to turned our profits into very thin profits or into eventual losses and at other time we allowed our losses to becoming so large that it is beyond our capacity to handle it and a single loss will be more than enough to erode our entire capital.
So we all should have a proper exit plan before entering into a trade so that we knew in the advance that what to do if certain situation arises in the future which can either be in our favor or against us. There are several ways to use an exit plan etc fixed stop losses, trailing stop losses, reverse entry rule, profit target. It varies from person to person because we all use different trading methods or time frames but it is must that there should be an exit plan for every trading method so that we should be able to follow the most tried and tested holy grail of stock market " to cut your losses and let run your profits". As one of the greatest trader in history of Stock Market Paul Tudor Jones said "Don’t focus on making money; focus on protecting what you have.” It is only possible through when we will have a definite exit plan. So Forget about the entry, Plan for exit.