Going into a combat mission without an exit plan is suicide. In fact, the only soldiers who never bother with exit plans are kamikaze. On the other hand, market participants routinely enter positions without a clear exit plan. The problem is that as soon as we enter a position, our emotions impair our ability to make rational decisions. Greed and fear have a chemical signature. This is the first article of a series of four about exits and emotional mastery.
- Price goes down, there is a loss: at what price do we reduce risk ? How much do we need to exit ?
- Profit goes up, there is profit: At what price do we take risk/money off the table ? How much do we need to exit ?
- Price goes nowhere: how many days after entry ? How much do we need to exit ?
- It reduces the need for constant monitoring: market participants often stay glued in front of their monitors expecting the markets to telegraph a compelling call to action
- It helps navigate volatility. Volatility often tempts us into action. Having a plan and sticking to it helps reduce the urge
- It frees up mental space that can be used for higher cognitive functions: research and planning.