Entry and exit planning

In simple terms

Most trading discussion focuses on when to buy. Most trading damage comes from when to sell: holding losers in the hope they recover, or selling winners too early from fear. A plan written before entering, covering both entry and exit, takes those decisions out of the heat of the moment.

As with the rest of this module, this is an educational exercise in thinking clearly about risk, not a recommendation to trade.

The parts of a plan

A complete plan for a hypothetical trade answers five questions before any money is committed:

1. Hypothesis: what do you think might happen, and why? (See the chart process lesson.)
2. Entry condition: what must happen before you act? For example, a daily close above a resistance zone.
3. Invalidation point: at what price is the hypothesis clearly wrong?
4. Exit for profit: a target price, a trailing rule, or a time limit.
5. Position size: how much to buy so that a loss at the invalidation point is affordable, covered in the position size lesson.

Invalidation comes from the idea

The invalidation point should be where the reason for the trade no longer holds, not where the loss starts to feel uncomfortable.

Why exits matter more than entries

Consider two traders using the same entries.

• One cuts each idea at its invalidation point and lets winners run to their targets.
• The other holds losers, hoping they recover, and takes small profits quickly.

Even with identical entries, the first trader's average loss is limited and average win larger; the second's losses can grow without limit while gains stay small. Over many trades, the exit rules decide the outcome far more than the precise entry price, as the expectancy lesson shows.

Time-based exits

Some ideas neither succeed nor fail; the price drifts sideways. A time stop closes the position if the expected move has not happened within a set period. It frees money and attention, and stops a short-term idea quietly becoming a long-term holding nobody planned.

Partial exits and trailing stops

Plans can include selling part of a position at a first target and managing the rest with a trailing stop that rises with the price. These are choices, each with trade-offs: they reduce the effect of reversals but also cut the size of the biggest wins. What matters is that they are decided in advance and applied consistently.

Sticking to the plan

The plan exists for the moments when sticking to it feels hardest: when a loss is mounting and recovery seems near, or when a gain appears and fear says take it now. Record in your journal whenever you break the plan, and what happened. Over time, this shows whether your departures help or hurt.

Why it matters

Unplanned exits are where emotion does the most damage. Writing entry, invalidation, profit exit, time limit and size before entering turns a vague hope into a defined experiment, limits losses on ideas that fail, and makes results measurable.

Limitations

A plan cannot control gaps, which can carry prices beyond invalidation levels, as the price gaps lesson explains. Targets and invalidation levels are judgements. And a well-made plan does not make a weak idea profitable; it only limits the damage and records the result.

Common mistakes

• Planning only the entry.
• Setting invalidation by comfort rather than by the idea.
• Moving the invalidation point further away once the price approaches it.
• Taking profits early from fear while letting losses run.

Try it yourself

1. Take a hypothesis from your chart journal.
2. Write the five parts of a plan for it: hypothesis, entry, invalidation, profit exit and time exit, and leave size for the later lesson.
3. Check that the invalidation point comes from the idea, not from a round percentage.
4. Follow the plan on paper over the next weeks and record the outcome.