One of the most valuable skills in life is the ability to effectively enter and exit situations, whether it’s a social event, a business venture, or most importantly, the stock market. Smoothly entering and exiting positions is crucial.
Trust me, it’s not as easy as it seems.
Before you buy a stock, you must have your entry and exit planned.
You wouldn’t embark on a major endeavor without a well-thought-out plan, right?
Just like any important venture, you need to be focused and execute a predetermined strategy if you want to succeed.
How to Enter
The best way to enter a stock would be to get issued a block of pre-IPO stock at zero cost… kidding, but wouldn’t that be nice!
There is no single right way, but here is how I approach entering my positions.
Tranching
Tranching into a stock means not buying in all at once but rather using patience to slowly accumulate a position in smaller increments.
Say you have $10,000 set aside to buy this stock. Instead of placing one large market order, break that $10,000 into quarters, so into $2,500 increments.
When your chosen stock hits your buy price, place your first order with ¼ of that $10,000 ($2,500). Now your foot is in the door.
Then, if the stock drops further, you can buy more. By only putting a portion of your desired allocation in initially, you have the opportunity to buy again at a lower price without overcommitting too early.
This strategy, known as “Averaging Down” or “Dollar Cost Averaging (DCA),” allows you to bring your average buy price down.
I typically space my buys out in 10% increments. So, every time the stock drops 10% or more, I buy again, until my desired allocation is exhausted.
This strategy can help you achieve a cheaper average buy price and accumulate more shares in an ideal situation.
However, sometimes the stock doesn’t get cheaper after your first buy. If the stock rises 10% and shows no signs of returning due to a catalyst, then I allocate the remaining 75% of my desired investment. You don’t want to miss out on a strong opportunity.
How to Exit
Congratulations on entering your position. Now, it’s time to plan your exit.
As discussed in my previous newsletter (read here), you should know your exit price and have a plan in place, avoiding emotional decisions.
Instead of selling all your stock at once, consider a more strategic approach.
A rule I use is to sell the amount I originally invested once I am up 100% on a stock (which would be half of the shares). This de-risks my investment, ensuring I can’t incur a loss, only profit.
Now, I let the remaining shares ride to new highs or lows.
This strategy helps secure profits, mitigate risk, and manage your portfolio effectively.
However, this approach works best if you anticipate or plan for a significant increase in the stock. If you’re only aiming for a 20% gain, this strategy may not be as useful.
Regardless of the percentage gain, selling portions of your holdings along the way is always a smart move to take risk off the table and secure profits.
Conclusion
In a perfect world, this is how I would approach entering and exiting positions. It’s not a one-size-fits-all strategy, but it emphasizes the importance of having a plan.
Disclaimer: This is not financial advice.
