In this article, we will discuss
- What are Entry Points in the Stock Market?
- What are Exit Points in the Stock Market?
- The Best Technical Indicators
- Conclusion
When you decide to trade in the stock market, there are two important decisions you need to make for every trade — when to enter the market and when to exit it. The entry points and exit points of a trade determine whether or not the transaction is profitable. What’s more, these crucial details also influence the amount of profit or loss for each trade.
Given that the entry and exit points are so important, how do you figure out what the appropriate price levels are? Technical indicators hold the answer to this question.
Let us examine the meaning of entry points and exit points and how you can use technical indicators to identify the right prices to buy and sell a stock in the market.
What are Entry Points in the Stock Market?
The entry point is the price at which you initiate a trade in the market. The common interpretation is that this is the price at which you buy a stock or security. However, if you are shorting, the entry point is typically the price at which you sell the security (since shorting involves selling and then buying a security).
The entry point is ideally the level at which you expect the price of a stock to continue moving strongly in any given direction. For instance, if you expect the price to move upward, you may enter a long position in the stock. On the other hand, if you expect the price to move downward, you may short the stock.
What are Exit Points in the Stock Market?
The exit point of a trade is the price at which you close an existing position in the market. If you have already initiated a long position in a stock, the exit point is the price at which you sell your holdings and exit the position. Similarly, if you already have an open short position in the market, the exit point is the price at which you close that position and buy the stocks.
You need to choose an exit point when the trend that you originally capitalised on may be coming to an end. For instance, if you rode a bullish wave and entered a long position in a stock, you need to select an exit point when the trend shows signs of a bearish reversal because it can help you maximise your profits before the price falls again.
The Best Technical Indicators
With a plethora of technical indicators available to choose from, you may find yourself becoming overwhelmed about making entry and exit decisions. Let us narrow down the options and discuss how the best few technical indicators can help you identify appropriate entry points and exit points for trades in bullish and bearish markets.
1. Support and Resistance Levels
The support and resistance levels are pivotal to identifying possible trend formation and trend reversals. Let us see what they each mean:
- Support: The support level is the price at which the demand for a stock is extremely strong. So, the stock price often fails to fall below that level unless the selling pressure exceeds the already strong buying pressure.
- Resistance: The resistance level is the price at which the supply of a stock is extremely strong. So, the stock price may have difficulty rising above that level unless the buying pressure becomes greater than the already strong selling pressure.
Depending on whether you are taking a long or short position in the market, you can use the support and the resistance levels to determine the entry points and exit points in different ways.
Entry Points Using Support/Resistance
In a potential bullish trend, the support level is typically the point at which the stock price rebounds and moves upward. This could present a buying opportunity. Alternatively, you can also find an entry point using the breakout strategy, where the stock price breaches the prevailing resistance level. The breakout indicates strong buying momentum, leading to a new upward trend.
Exit Points Using Support/Resistance
It is a common practice to choose an exit point near the resistance level because this is where the stock has previously peaked before reversing downward. Conversely, if a stock’s price breaks down past the support level, it may indicate the start of a strong downtrend and be a reason to sell.
2. Relative Strength Index (RSI)
The RSI is a momentum technical indicator that measures how much and how quickly a stock’s price has changed over a given period. Using the RSI, you can identify oversold or overbought conditions and determine if a stock is undervalued or overvalued.
Its value ranges from 0 to 100, and here is how you can find entry points and exits using the RSI value.
Entry Points Using RSI
If the RSI of a stock is below 30, it indicates that the stock is oversold. Since the selling pressure is high, it may be due for a rebound. So, you can wait for the buying pressure to mount or the selling pressure to fall as the RSI reverts to cross above 30. This may be a potential entry point.
Exit Points Using RSI
An RSI value greater than 70 means that the buying pressure exceeds the selling pressure. You can wait for this overbought condition to reverse when the RSI drops back down to 70, which may be a good time to sell the stock.
3. Moving Averages
A moving average is a mean value that is constantly changing. The moving average of a stock’s price is a technical indicator that smooths out the price data over a given period. There are two types of moving averages, namely a Simple Moving Average (SMA) and an Exponential Moving Average (EMA).
The SMA is the simple average of the stock prices over a given period. For instance, the 10-day SMA of a stock is the average of its price over the last 10 trading days. The EMA, however, gives more weightage to recent prices.
Entry Points Using Moving Averages
A common entry point is when the price of a stock or its short-term MA crosses above its long-term MA. This means that the stock’s price over the short term is rapidly rising, signalling a possible bullish run.
Exit Points Using Moving Averages
An exit point is usually identified when the stock price or the stock’s short-term MA crosses below its long-term MA. This points to a weakening uptrend or a building downtrend, where it may be ideal to sell rather than buy.
4. Bollinger Bands
Bollinger Bands are technical indicators that plot the negative and positive standard deviation of a stock’s price from its SMA. Typically, the lower and upper bands are 2 standard deviations on either side of the 20-day SMA.
Entry Points Using Bollinger Bands
If the price touches or dips below the lower band, it may be an entry point as the stock may be oversold. Additionally, if the upper and lower bands are approaching the MA line, it may point to a Bollinger Band squeeze, which may precede a significant price movement. You can also consider entering the market via a long or short position, depending on how it may move after the squeeze.
Exit Points Using Bollinger Bands
If the stock price touches or breaches past the upper Bollinger Band, you may want to sell or exit a current long position. This is because the stock may be overbought.
5. Stochastic Oscillator
The Stochastic Oscillator is a technical indicator that compares a stock’s closing price to a range of the high-low prices over a given period. Like the RSI, the Stochastic Oscillator also ranges from 0 to 100. Here is how you can identify entry points and exit points based on the indicator’s value.
Entry Points Using the Stochastic Oscillator
If the Stochastic Oscillator value falls below 20, it means the stock may be oversold and due for a rebound. Alternatively, a bullish crossover where the %K line (i.e. the faster Stochastic line) crosses over the %D line may also be an entry point.
Exit Points Using the Stochastic Oscillator
A Stochastic Oscillator above a threshold of 80 may indicate that the stock is overbought. This may mean that the stock’s price may decline soon, making it a suitable time to sell or exit a long position.
6. Moving Average Convergence Divergence (MACD)
The MACD is a technical indicator that combines the 12-period and 26-period EMA. It is a trend-following momentum indicator that shows you how the two EMAs are related. Graphically, the MACD is represented by two lines — the MACD line (which plots the difference between the 12-period and 26-period EMA) and the signal line (which is a 9-day EMA of the MACD line).
Entry Points Using MACD
If the MACD line crosses above the signal line, it may be a good time to buy as the momentum appears bullish. Look for crossovers that occur below the zero line, which may indicate even stronger bullish trends.
Exit Points Using MACD
If the MACD line crosses below the signal line, it may be the ideal time to sell or exit a long position as the trend is bearish. In this case, crossovers above the zero line indicate stronger bearish trends.
Conclusion
The technical indicators discussed in this article can help you identify suitable entry points and exit points for any trade. However, it is crucial to remember that you must never rely on any one indicator alone. The smart thing to do is use a combination of different technical indicators to figure out the most profitable entry and exit points for a long or short position you want to initiate.
That said, you can never be too careful. So, ensure that you always set a stop-loss order along with your trade. This will help you limit the downside risk if the market moves in an unfavourable direction. The combination of optimal entry points and exit points and a protective stop-loss limit can help you leverage stock price movements without taking on disproportionate risks.
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