The Complete Trade Entry & Exit Guide

One of the worst mistakes beginning traders make is to not pay enough attention to their trade entries. Neglecting the importance of a good entry and exit can make a huge difference to your bottom line. In this artcile, you will learn everything you need to know about opening and closing trades.


Video Lesson

First of all, make sure to check out the following video lesson in which I cover the most important points of this article.


Trade Setup

Before you are ready to send out an actual entry order, it is important that you set up and potentially analyze your position first! Regardless of your trading system, you should always review potential trades before putting them on. Never just jump the gun!

profit and loss

One very important aspect of preparing for a potential trade is creating a trading plan! Without a clear trading plan, you are basically trading blind. To help you develop a good trading plan, here is a list of some of the most important aspects that your trading plan should cover:

  • Define your risk: Before opening any position, you should always define your risk. An appropriate risk level is a point at which the odds of your position no longer are in your favor. It is very important to set this risk level before you enter the trade. Otherwise, it is way too easy to get influenced by emotions and hold on to the position much longer than you should.
  • Define your reward: It is just as important to define your reward as it is to define your risk. Not doing this often leads to the common trading error of giving a winner turn into a loser. If you never take profits and just want to ‘let the winner run’, you will very likely let it run all the way into a loss. Don’t let this happen to you! Always set profit targets and stick to them.
  • Define your risk/reward: This shouldn’t be too hard after you have defined your risk and reward. Having a good risk to reward ratio can be important, especially in stock trading. However, it isn’t the only factor to consider. In options trading, the probability of profit (POP) should be considered as well. If you have a very good probability of profit on a trade, it is okay that your risk is greater than your profit potential. But if you aren’t trading options, it is a good idea to keep your risk to reward ratio above 1:2.
  • Define your exit: You should ideally create a concrete exit plan before opening a position. This exit plan should tell you how you will close your position. For instance, you could close your entire position in one order or slowly scale out of it. Your exit plan should also tell you when to exit your trade. Possible exit triggers could be a price level, indicator value, P&L, time, probability of profit, etc. Furthermore, if you plan on adjusting your trade if it goes against you, make this clear in your exit plan.
  • Define your entry: Besides having a clear exit plan, you should also have an entry plan. This should cover similar aspects as the exit plan, but also things such as your entry price and position size. Ideally, your position size should be relatively small compared to your overall account size (1-5%). Never ever risk 100% of your account on a single trade. Doing this will guarantee you to blow up with time.
  • Other Notes: Besides the just mentioned points, you can add even more things to your trading plan. Examples could be the motivation behind your trade, your directional assumption, current market conditions, etc.

I can’t emphasize the importance of a trading plan enough. Trading without a plan and thus without defining your risk can be quite dangerous. A trading plan allows you to objectively define your edge. As soon as you open a position, it will be very hard (close to impossible) to think and judge your trade completely objectively. Therefore, it is very important to create a trading plan BEFORE opening your trade. Doing this will allow you to trade much more mechanically and diminish the influence of your emotions on your trading decisions.

Furthermore, a trading plan is the only way to make sure that you are actually trading with your edge. If you have a clear plan with specific criteria, you can get a good idea of how good your strategy is working. But if you only pay attention to your trading edge half of the time, you won’t be able to monitor the effectiveness of your trading style/edge. If you trade with your edge in mind and always have a good trading plan, you will get direct feedback on if your edge is working or not. A (big enough) set of losing trades will tell you that the edge isn’t working as intended and winning trades will do the opposite.

However, if the reasoning for your trades is inconsistent, then so will be your results. A (big enough) set of losers won’t give you an idea about the effectiveness of your trading system if you are only using the system on half of your trades.

So make sure to always have a trading plan before you open any positions!!!

Especially for beginners, I recommend actually writing down your trading plan. This is a great exercise in risk management and trade planning. Furthermore, creating a trading plan forces you to rethink your entire trade. Reconsidering all the aspects might shed light on certain overlooked things that you otherwise would have missed.

First after you have defined all your trading aspects, you are ready to actually send out an entry order.

But just as important as having a plan, is actually sticking to it. Traders should always be disciplined, stick to their plans and avoid improvisation. Further down in this article, I will present a few tricks that can help you with sticking to your plan.


A Brief Note on Liquidity

Before we get into specific entry and exit orders, I just want to emphasize the importance of liquidity.

Liquidity is by far the most important aspect of trading. Without liquidity, there is no market! Liquidity is the ability to easily enter and exit positions. Liquid assets usually have high volume and a lot of open interest (more on that further down).

The Bid/Ask spread is the spread between the highest price that someone is willing to buy an asset for and the lowest price that someone is willing to sell for. The more liquid an asset is, the tighter this Bid/Ask spread becomes. A 1 penny wide Bid/Ask spread is obviously much better than a $1 wide Bid/Ask spread. I want to show you the impact of a wide Bid/Ask spread on an illiquid asset with a brief example:

Let’s say you normally don’t trade very liquid assets and thus the Bid/Ask spread for a typical trade of yours is $0.5. Furthermore, you normally trade 100 shares/contracts. This means that you lose about $0.5 (per share/contract) because you have to buy at the Ask price and sell at the Bid price. So for each trade, you leave about $50 on the table just because of a wide Bid/Ask spread. Now let us say, you make around 100 trades in a year. This would mean that you leave about $5000 on the table just because you are trading illiquid securities! That is $5000 without even considering the costs of commissions and losing trades.

As you can see, trading illiquid assets is a fatal trading mistake. Always make sure to only trade liquid assets with very tight Bid/Ask spreads.

SPY Liquidity

Trading liquid assets won’t only save you money, it will also save you time because you usually are filled much faster on them.

Hopefully, this convinced you to only trade liquid assets in the future!


How to get filled faster:

how to get filled faster

Waiting for fills can be annoying. But before you change your order price, I recommend having some patience. As long as you aren’t trading on a super short-term basis, you don’t have to rush into the next position anyway. Just give the market some time to move in your direction. I often send out an order slightly above the market and then go do something else. You don’t have to sit in front of your computer screen and wait to receive the fill (as long as you aren’t trading for the very short-term).

Here are a few helpful tips to get filled faster:

1. You may have noticed that not all options on an option chain have the same volume/open interest. Some strike prices have a higher volume than others. It can be a good idea to choose these strike prices to receive faster fills at better prices. However, only do this if the strike prices fit the setup of your overall strategy. Don’t adjust your entire strategy just to pick strike prices with more volume.

Here is a screenshot of the different volume of different options:

Options Volume

2. *Try to leg into trades. Instead of sending out an open order for your entire position, you could try to break the position into pieces. For example, for iron condors, you could open the call side and the put side separately. But note that if one of your sides receives a fill, you are exposed to additional directional risk. If the underlying price moves a lot, the price of the other side of your trade may change as well. This can impact your initial entry target price negatively (or positively).

3. *Besides, splitting up the different legs of your trade, you could also split up the contract size. For example, instead of ordering 100 contracts at once, you could order 50 contracts twice. Alternatively, you could split up the order even more. But if you can’t receive fills at the desired price, you may end up only having a fraction of your planned position.

4. Place your orders at round numbers. Placing orders at round numbers can often help with receiving fills faster. For example, instead of ordering at $1.49 or something similar, you could try to order at $1.50.

5. Last but not least, you can always resort to changing your entry price. But only do this if the new price is still good enough. Don’t do it if it significantly increases your risk and lowers your profit potential.

*Only do this if your broker fees are per contract. Don’t do this if you have to pay a high commission for each order.


Definitions of Order Types and other Important Terms:

Fill

When your broker successfully executes an order, that order is considered filled.

Volume

 The total amount of shares/contracts traded over a given period of time (usually one day). This shows how active a market is.

Open Interest

The number of outstanding option contracts that weren’t closed yet. This usually indicates how deep a market is.

Mark

The price for the last bought contract. This is a good way to get an idea of what orders are getting filled, especially for wide Bid/Ask spreads.

GTC (Good Til Cancel)

If you select GTC when ordering, your order will run until it is filled or you cancel it manually. Brokers often cancel these orders automatically after very long times (e.g. half a year).

GTC Order

GTD (Good Til Date)

A GTD order works just like a GTC order with the only difference being that it will be canceled at a certain, predetermined date (unless the order is filled or you cancel it manually).

DAY

If you choose DAY when ordering, your order will run until the market closes that day, except if you get filled (or cancel it) before that.

EXT

EXT orders are orders that also work during extended hours (pre-market and after-hours).

There are different ways to open/close positions. Try not to mess these up:

  • Buy to open –  Sell to close (Long)
  • Sell to open –  Buy to close (Short)

Most brokers allow you to select a closing order when exiting trades. Try to always do this if available. This will diminish the human error of accidentally choosing the wrong exit order type.

Tastyworks Order Screen

Order Types:

Limit Order

Order for one specific price. If the price won’t drop/rise to your set price, you will not get filled.

Market Order

Orders at the next available price. This is the fastest way to get filled, but the pricing probably won’t be good.

Stop Order

As soon as the market price reaches one custom set price, you will get filled at the next available price.

Stop Limit

The same as a stop order but instead of getting filled at the next available price, you can choose a certain price.

Trail Stop

A stop order that moves up with the market price, but not down (for long positions). A stop order that moves down with the market price, but not up (for short positions).

Trail Stop Limit

A stop limit order that moves up with the market price, but not down (for long positions). A stop limit order that moves down with the market price, but not up (for short positions).

Market on Close (MOC)

A market order that is sent out as close as possible to the market’s close.

Limit on Close (LOC)

A limit order that is sent out as close as possible to the market’s close.

Advanced/Contingent Orders

More advanced orders exist as well. These more advanced contingent orders allow you to set certain order criteria. For instance, you could set up a bracket order which sends out two orders (one to take profits and one to cut losses) and as soon as one is filled, the other order is automatically canceled.

These more advanced orders can be especially useful for traders with little time since they allow you to automate some parts of your trading process.

But note that not all brokers have these more advanced order types.

I personally recommend limit orders over market orders. Limit orders let you choose your own price and they make sure that you will receive good pricing. Sometimes you won’t get filled at this good price, but that’s still no reason to enter a position at a bad price. I’d rather risk not getting filled than risk getting filled at a bad price.

If you found these brief explanations of order terms useful, I highly recommend picking up my free trading glossary. In it, you can always look up unknown trading terms on the fly.

Click Here to check out my Free Trading Glossary!


Exit Levels, Stop Losses and Closing Trades Early

It is very important to take profits! Taking profits actually increases your probability of profit and thereby your win-rate. Even though it might seem counterintuitive, it is actually quite logical. If you take off a winning position, it is a guaranteed winner. If you leave it on, there still is a chance that the trade will go against you and end up becoming a loser.

To prevent this from happening, it is important to take profits when you have them! Don’t let them turn around. Believe me, the feeling of letting a winning position turn in to a loser is one of the worst feelings.

In options trading, I rarely recommend trying to achieve max profit. For most option strategies (e.g. short iron condors, short strangles, credit spreads…), 50% of max profit is a very good profit goal. This might seem like a very conservative goal. But remember that together with your P&L, your risk/reward ratio also changes. From a risk management standpoint, it is often not worth it to leave a position on for the last piece of its potential profit.

Taking losses, on the other hand, is a totally different story. Most people say that you should always cut your losses short. This is true to some extent. But cutting losses as soon as a trade goes against you isn’t always the best idea, especially when trading options.

The same concept of taking profits to lock in profits applies to cutting losses. If you take a loss, it is a guaranteed loss. However, if you leave it on the table, it might still turn around and become a profitable position. Due to this, it is important to not cut losses too fast. Note that this advice only applies if you are trading limited risk positions. If your risk is undefined, you should not let your loss get out of hand!

Defined risk option trading strategies allow you to easily leave losing positions open until shortly before expiration. You can’t lose more than a certain amount on these positions anyway, so instead of locking in that loss, you might as well wait and hope for a turnaround.

For other positions that don’t have limited downside risk (e.g. undefined risk option strategies, stock trades etc.), you should set a max risk level before opening your trade. You could use stop-losses to automate cutting losses. But don’t set the stop-loss too close to your entry point as you otherwise, likely will get stopped out too early. (For strangles, straddles and other undefined risk option strategies, a risk level of about 2x the collected credit could be used).

Just make sure to define and fully accept your risk before opening any positions.

To trade more mechanically, you could and should use special orders like stop-losses, GTC, and other orders. For example, I normally send out a GTC order at my profit target (usually 50%) directly after one of my option positions gets filled.

This will automate the profit-taking process and eliminate the influence of emotions.

Furthermore, you could use alerts as triggers for adjustments or exits. If your broker provides advanced orders, you could also use them to automate your trades.


Conclusion

This was a long post, so let me quickly sum up some of the most important points.

Firstly, you should always have a trading plan and make sure to create this BEFORE you open your trade. If you don’t know how to create a trading plan, just use my template

Otherwise, don’t use market orders, but instead, use limit orders. A good limit price to start with is the mid-price. 

Furthermore, focus on trading liquid securities with high volume. Otherwise, you are just throwing money out of the window.

Last but not least, make sure to keep a trading journal so that you can track your progress and learn from your mistakes. If you don’t know how to create a trading journal, check out my guide on the best trading journals for you.

12 Replies to “The Complete Trade Entry & Exit Guide”

  1. This is not rubbish. It is very fascinating how statistics can work out for the average skipper. Thanks for sharing these things with the world. I hope you find success in the knowledge you have and I hope I will be able to take advantage of this one day. Business is a slippery little penguin to catch!

  2. Very interesting thanks for sharing, I have always been skeptical on getting in afraid I would lose everything. After reading your article I will play with the entry numbers as you have illustrated, I may get brave using your technique. I bookmarked your sight and if I get brave will let you know how it went. Thanks again for sharing.

    Randy

  3. My question is: IF I have an exit strategy when I am going to enter a trade, do I add the exit strategy when I put in the entry strategy right then as part of the purchase of the option?

    1. Hi Carla,
      I am not entirely sure what your question is. If you are asking if you should send out the exit orders of your exit strategy right after entering your trade, then my answer is: it depends.
      Depending on your exit strategy, you might not be able to set up your exit orders immediately after you open your position. However, if your exit strategy allows you to do this, then it is good practice to do so. Nevertheless, it isn’t that important how you actually implement your exit strategy as long as you have one and follow it.
      I hope this answers your question. Makes sure to let me know if you have any other questions or comments.

    1. I can’t really give you a rule of thumb. But here are some things you should look out for:
      -Volume/Open Interest: Especially on less liquid assets, you should focus on the options that are traded most so that you can get the best entry/exit price without much delay.
      -Risk/Reward: Compare different strike prices, the price of those options and the corresponding risk/reward ratios.
      -Probability of Profit: Depending on the strike price, the probability of ITM and thus the probability of profit will change.
      Try to find a good mix between these metrics, your buying power, and directional assumption when choosing strike prices.
      I hope this helps.

  4. Hi, Thank you so very much for this amazing article on the Complete Trade Entry & Exit Guide. Personally, I received clarification of a lot of things I never knew, especially the fact that all options in the options chain have not the same volume/open interest and would also like to share this website with friends and Families because it is very eye-opening. thanks:

  5. I know that finding a good article does not come by so easily so i must commend your effort in creating such a beautiful website and writing an article to help others with useful information like this. i have been in need of a trading tutor and i think that you can help. can i get a personal class?

    1. Hi,

      Thanks for your comment and the positive feedback. As of right now, I do not offer any one on one coaching. But if you ever have any questions or comments, I will certainly answer them. So if you ever need help, just leave a comment.

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