Entries, Exits, and Money Management

What the watch list doesn't tell you

You have a watch list: companies you've researched, valued, and decided are worth owning at the right price. That list answers one question — what. It says nothing about when, how much, or when to leave. Those are the remaining sections of the plan, and they're the ones that decide whether your research turns into money.

This is where most people stop. Picking companies feels like the real work, and it's the part that gets talked about. But you can be right about a company and still lose money on it by buying at the wrong moment, buying too much of it, or holding it long past the point your reasoning broke. The rules in this lesson are what stand between a good analysis and a bad outcome.

Everything here comes from a trading plan — written rules for what you buy, when you exit, and how much you risk. Written down, in advance, before there's any money on the line.

Why the rules have to exist before the money does

Here's the honest reason for all of this, and it isn't discipline for its own sake.

You cannot think clearly while you are losing money. That's not a character flaw, and knowing it about yourself doesn't fix it. When a position you researched for hours is down 15%, the part of you that does careful reasoning gets outvoted by the part that doesn't want to have been wrong. You will find reasons to hold. They will sound good. Some of them will even be true, which is what makes them dangerous.

The person who decides your exit should be you on a quiet afternoon with no position open — not you at 10 a.m. watching the number drop. Writing the rule down is how the calm version of you overrules the panicked version. That's the entire mechanism.

The same applies going the other way. A stock that's run up feels like it will keep running, and the rule you wrote is what stops you from turning a good outcome into a round trip.

Entry signals: when to act on a name you already like

By the time a company reaches your watch list, you've already decided the business is worth more than its price. Entry rules only handle timing. They don't second-guess the analysis — they try to avoid buying into a stock that's still falling.

The sample plan offers two signals. Either is enough.

A breakout from a basing pattern

A stock that made it through your technical filter is forming a basing pattern — a stretch where a falling price has stopped making lower highs and lower lows and started making roughly level ones. The decline has stalled. Sellers and buyers are, for now, evenly matched.

The signal fires when the price pushes decisively above the top of that range — a breakout — and sets a new higher high. That's the first evidence that buyers have taken over, which is what has to happen if the price is ever going to climb toward your estimate of what the business is worth.

A cross above the 200-day simple moving average

A simple moving average (SMA) takes the closing prices over some number of days and averages them, plotting one point per day. Connect the points and you get a line that follows the price but smooths out the noise. A 200-day SMA averages the last 200 closes, so it moves slowly and ignores almost everything that happens in any single week.

When the price crosses above its 200-day SMA, momentum has turned upward. That's your signal.

It is the blunter of the two. A moving average is built from the past, so it always lags the present — by the time the line is crossed, the move is underway and you've missed the start of it. What you get in exchange is fewer false alarms. It won't react to a single dramatic day, which is usually a feature.

One refinement worth knowing: a price can cross above the line on a Tuesday and slip back under by Friday. Waiting for the week to close above the average filters out some of those head-fakes. It also means you enter later. That's the trade.

Figure

Most stock screeners can watch for either condition for you — a price crossing above its 200-day average is a standard filter, and you can run it the same way you ran your value screen. The tool doesn't matter. Any broker's screener will do this.

Exit rules: written first, used later

Decide how you'll leave before you arrive. Not because exiting comes first chronologically — because your exit price is an input to the next section. You cannot work out how many shares to buy until you know where you'd sell. Entry, exit, and size are one decision made at one sitting, not three decisions made in sequence.

The sample plan has three exits. They fire for different reasons.

The price exit: the trade went against you

Find a support level on the chart — a price area where buying has repeatedly stopped a decline, a floor buyers keep defending — and set your exit a little below it. The sample plan uses 3% below.

The logic is that support is where buyers have shown up before. If the price drops to that floor, you don't want to be selling into the ordinary bounce; you want the floor to have a chance to hold. Only if the price cuts through it — past the level and past a little cushion beneath it — has something changed that your chart said shouldn't happen. Support is the barrier you're counting on; the 3% is the room you give it to work.

Figure

Stops or alerts: two ways to enforce it

Once you know the price, you choose how it gets acted on.

A stop-loss order is a standing order with your broker: if the stock trades down to your level, sell. It executes whether or not you're watching, which is the point. It is also protection from yourself — it sells before you can talk yourself into "it'll come back," and it commits you at the moment of purchase, when you're still thinking straight.

A price alert just tells you. Text, email, whatever — the stock hit your level, and now you decide.

Neither is better. They fail differently:

• A stock dips a hair below your level and snaps right back. A stop already sold you out of a position that was fine. An alert would have let you look and stay.
• A stock drops through your level and keeps going. The stop is already out. The alert reaches you in a meeting, and by the time you can act, you're much further down than you planned to be.

So the choice is really about which mistake you'd rather make, and how honestly you can answer that. If you know you won't act fast — or won't act at all, because acting means admitting you were wrong — the stop is doing something for you that you won't do for yourself.

One thing to understand about stops before you rely on one: a stop is not a guaranteed price. It's a trigger. When your level is hit, the order becomes an instruction to sell at whatever the market is paying right now, and it goes into the same queue as everyone else's. The gap between the price you expected and the price you got has a name — slippage. In a calm market it's small enough to ignore. When a stock gaps down overnight on bad news and opens well below your level, it isn't: you sell at the open, not at your number, and the loss is bigger than the one you planned. Stops cap your intended loss. They don't cap your actual one.

The thesis exit: the reason broke

Your exit doesn't have to be about price. If the company lowers its earnings forecast — or anything else surfaces that makes the assumptions behind your intrinsic value estimate look too optimistic — the case for owning it has weakened on its own terms, at whatever price it's trading.

This one warrants a full exit, not an adjustment. Your number was built on those assumptions. If they've moved, the number moved, and the gap you were buying may not be there anymore.

The target exit: you were right

The good one. Your target price is the level where you'd sell at a profit, and for a value investor it's a number you already have: your current estimate of intrinsic value, what you think the business is actually worth. The price climbs to it and stops being a bargain. Nothing is wrong with the company. It's just fairly priced now, by your own reasoning, and a fairly priced stock isn't a value investment. Take the money to the next candidate on your list.

This exit is harder to take than it sounds. A stock that just made you money feels like it will make you more, and selling into strength feels like leaving something on the table. Sometimes it is. But your estimate is the only thing that told you to buy in the first place — you don't get to keep it as a reason to buy and discard it as a reason to sell.

Money management: how you survive being wrong

This is the part beginners skip. It's also the part that keeps them solvent, and it deserves more attention than picking the stock did.

Start from the premise, because everything else follows from it: you will be wrong. Not occasionally — regularly. Your estimate rests on assumptions about a future nobody has seen, and a meaningful share of your carefully researched positions will not work out. That is not a sign you're doing it badly. It's the job.

If you accept that, the question stops being "how do I avoid losses" and becomes "how do I make sure no single loss matters." That question has an actual answer.

Trade risk: what one share can cost you

Trade risk is the loss per share you'd take if the position goes wrong and your exit fires.

Trade risk = entry price − stop price

That's it. It's the height of the gap between where you get in and where you get out.

Position sizing: turning that into a number of shares

Video coming soon

This lesson explains the idea in full without it.

Position size is how much of your portfolio one investment takes up. And the sizing rule is the one idea in this lesson worth memorizing:

Decide what percentage of your portfolio you're willing to lose on any single position. Then buy the number of shares that makes that true.

Position size = (portfolio × risk percentage) ÷ trade risk

The sample plan puts the risk percentage at 1% to 2% — nearer 1% if you're cautious, up to 2% if you're not. That's a judgment call, not a finding.

Work it through with a portfolio a real person might have. Say you've got $4,000 invested. At 1%, the most you'll lose on any one position is $40.

Fictional XYZ triggers your entry at $20 a share. Support sits at $18, so your stop goes 3% below that, at $17.46.

Fifteen shares of a $20 stock is a $300 position. If XYZ falls through your stop, you lose about $38 — right where you meant to be.

Now the same rules on a $40,000 portfolio. The 1% is $400. The trade risk is still $2.54 a share, because that's about XYZ, not about you. $400 ÷ $2.54 is 157 shares — a $3,140 position.

Different number of shares. Identical risk: 1% either way. The dollar amount is not the rule. The percentage is the rule, and it works the same whether you're investing $400 or $400,000. You don't need a big portfolio to do this correctly. You need the arithmetic, and it's this arithmetic.

Notice what the formula does that eyeballing it can't. If XYZ's nearest support had sat much lower, putting your stop down at $14 — $6 of trade risk a share instead of $2.54 — the formula would have told you to buy 6 shares, not 15. Riskier setups get smaller positions automatically. Nobody has to be disciplined about it; the math handles it.

Adjusting stops as the position moves

Once you're in, the position doesn't sit still. If XYZ climbs to $26, your stop is still down at $17.46 — which now means your trade risk has quietly grown to $8.54 a share. You have more to lose than you signed up for, and the gains that created the gap are unprotected.

Two situations justify moving the stop up:

New support forms. If the price establishes a higher floor above your stop — a new level where declines have repeatedly stopped — you can move your stop to 3% under that. Same logic as before, applied to newer information. This locks in some of the gain and pulls your risk back toward where it started.

The company's outlook changes. Bad news that isn't bad enough to exit on — a missed earnings quarter for a reason you think is temporary — may still justify tightening the stop. It's a judgment call, and it should feel like one. You're saying: I still want to own this, but I want less exposure to being wrong about it.

There's one rule with no judgment in it at all:

Diversification: the risk sizing can't reach

Position sizing protects you from being wrong about a company. It does nothing about being wrong about an industry — because when a sector gets hit, everything in it falls together, and three carefully sized positions in the same business become one large position wearing a disguise.

Diversification is spreading money across many investments so no single one can sink you, and it has to run along industry lines, not just company lines. The sample plan's version: no more than two companies from any one industry, so a ten-stock portfolio ends up spread across at least five.

Those numbers are, again, one investor's choice — there's nothing magic about two and five. The principle underneath them isn't arbitrary, though: whatever your limits, count your industries, not just your positions. It's easy to end up with ten stocks that are really one bet, especially in value investing, where a whole sector often looks cheap at once for the same reason. That reason is usually a real problem.

Routines: how the plan survives contact with your week

A plan you don't execute is a document. Routines are what turn it into behavior — and they matter mostly because the alternative is checking your portfolio when you happen to feel anxious about it, which is the worst possible schedule.

The organizing idea is simple: match how often you look at something to how fast it actually changes. Entry and exit signals move daily, so watch them daily. A broad market trend takes weeks to turn — checking it hourly generates noise, not information. Patterns in your own decision-making take months to become visible at all.

The monthly review is the one to protect, because it's the only routine aimed at you rather than at the market. Keep the journal — what you bought, why, and what would have proven you wrong — then read it back and ask:

• Did I actually execute my entries, stops, and exits the way I wrote them?
• Are my growth-rate and discount-rate assumptions still reasonable given what the market has been doing?
• Are my position sizes and industry spread still appropriate for what I'm trying to accomplish?

Look for the plain failures first — the times you didn't follow your own rules. Those are worth more than any market insight, because they're the ones you can actually fix. A rule you keep breaking is either the wrong rule or a rule you don't believe. Either way, that's information about your plan, and you only get it by writing things down and reading them later.

Adjust the frequencies to fit your life. Someone with a full-time job is not checking entry signals at 10 a.m., and a plan that requires it is a plan that will be abandoned. Build the routine you'll actually run.

Key takeaways

• Written rules exist because you can't reason clearly while losing money. The version of you who sets the exit on a quiet afternoon is the one who should be making the decision — writing it down is how that version overrules the panicked one.
• Entry, exit, and position size are one decision, not three. You can't size the position until you know where you'd sell, so decide all of it before you buy anything.
• Position sizing is how you survive being wrong, and you will be wrong regularly. Risk a fixed small percentage of your portfolio per position — the percentage is the rule, and it works identically at $400 or $400,000. Shares = (portfolio × risk %) ÷ (entry − stop).
• Never move a stop down. Moving it up on new support locks in gains; moving it down converts a loss you chose into a loss you didn't.
• Count industries, not just positions. Sizing protects you from one company being wrong; only diversification across industries protects you when a whole sector falls together.
• Every specific number in this lesson — 3% under support, 1% to 2% per position, two per industry — is one investor's choice, not a law. Copy the structure, not the digits.