Indices

There are many formulas and theories on when you should enter a trade position.  This makes for a relatively easy beginning to a trade.  The investor just picks a method and goes with it.  Knowing when to get out of a trade is another story.  There are also theories that correspond to exiting a trade, but they are no where near as concrete as when entering.  The incomplete science of trading stocks is at its most mysterious when it comes to exiting a position. 

Obviously, you want to hold on to a position as long as it is profitable in order to generate the most profit possible.  Unfortunately, it is impossible to predict how long this will be the case.  When it comes to fundamental analysis, there is no set in stone method.  Usually, an investor will be able to determine what a share is actually worth by looking over the particular company’s financial reports.  When a stock rises too above that price, investors begin to be wary of holding on for much longer.  One key statistic often examined here is the price / earnings ratio, or, as it is more commonly referred to, the P/E ratio.  This number indicates a general assessment of a stock’s worth in one simple number.  The P/E ratio is simply the market price of a stock divided by the earnings per share over the past year.  If a stock currently costs $30, and one year ago it cost $27, it has an earning of $3 per share.  This gives us a P/E of 10 (30/3).  The lower the P/E, the more of a bargain you are getting on the trade.  When a P/E ratio becomes inflated, it is usually a good time to exit that position. 

Another exit strategy that nearly all fundamental analysis experts agree upon is that you should sell a stock once it loses one third of the profits generated since you entered the position.

Those in the technical analysis school base their sell price on elaborate charts and numbers.  The Moving Average Convergence/ Divergence (MACD) is a common indicator used.  This chart relies on data from the past 12 to 26 days and shows the difference between fast and slow Exponential Moving Averages (EMA).  A signal line is also generated and laid over the same chart.  This signal line is usually an EMA of the past 9 days of stock activity.  This setup, which ranges over both positive and negative numbers, tells investors a number of things.  When the MACD line crosses the signal line upwards, this generates a buy signal.  When the MACD line crosses downwards, investors are supposed to sell.  When the MACD line crosses up through zero, the stock is bullish.  When it goes below the zero line, the particular share is bearish.  The math for calculating EMAs is generally complex, but there are many software programs that will chart these things for you. 

There are several other theories on when to exit a position.  These are merely two of the most popular techniques used.  This is intended as an introduction to a very indefinite subject.

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