If you truly want to be a successful trader, knowing when to exit is essential. Knowing when to buy is the easy part. It’s knowing when to get out that offers the most challenge.
Look at this two-year chart of Facebook (FB) for example.
In early June 2019, the stock was a disaster. Not only was the broader market breaking down on trade war fears, but Facebook was plummeting on investigations.
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However, we could soon tell the pullback in Facebook was greatly overdone. Fear had reached an epic level. ot only was Facebook oversold at its lower Bollinger Band (2,20), but relative strength (RSI) was at its 30-line. And, as you can see historically, when that happens, we begin to see a reversal in the stock. At the same time, MACD pulled back to an unsustainable low, and Williams’ %R was below its 80-line.
All of the indicators aligned in oversold territory, which gave way to a rally. Shortly after alignment, the stock rallied from $161 to $195 a share – in just days.
All thanks to an excessive bout of fear, which would give way to extreme greed.
Greed is a Trade Killer
When a stock like Facebook begins to rally, many of us don’t want to sell for fear of missing out, or what’s commonly known as FOMO. We tell ourselves, “If only I held on to the stock a bit longer, I could have walked away with more money.”
And while that can be true, greed can kill your trade.
Had I bought shares of FB at $161, I would have had no problem cashing out at $195. After all a $34 gain in days isn’t anything to sneeze at. Plus, it would have been the smart move based on technical pivot points that were now aligning in overbought territory. In addition, the stock was running into double top resistance.
Now, not only was the stock overbought at its upper Bollinger Band, RSI began to pivot along with Williams’ %R that was now above its 20-line. Not long after, shares of Facebook would begin to pivot and slide lower.
While such a strategy will not work 100% of the time, it can help you pinpoint excessively overbought and oversold conditions. Having the ability to know when to buy and when to exit a trade successfully puts you one step ahead of the herd.