Smart Entry and Exit Strategies for Today’s Volatile Markets

In all of those situations, investors should consider a methodology for how and when they will enter and exit positions. Having a plan in place can prevent emotional decision making which may lead to better outcomes in the long term. Some of those approaches include concepts like dollar-cost averaging (DCA), tactical buying during dips, and setting clear exit targets.

An exit strategy requires established rules on when to reduce or sell an investment position. Those parameters can determine when investors harvest their gains during an upswing or how they limit their losses when the market takes a downturn.

However, selling decisions can be highly emotionally charged. It’s best to have a preset exit point to prevent panic selling or maintaining a position that’s in freefall for too long in the hopes it might turn around. With a set plan – in particular, during volatile periods – you can more easily avoid second-guessing yourself.

Exit targets may be based on price changes (e.g., +25% gain or -15% loss), technical indicators, or time-based reviews. But this must be established ahead of time rather than when markets are going haywire. The idea is to remain grounded in your long-term goals and not be distracted by short-term market moves.

An investor who knows they must sell a certain portion of their position in an asset once it increases by a certain amount has put in place a framework that can support rational decision making. It gives them a path to seek to protect their capital in uncertain times.

DCA involves investing a predetermined dollar amount on a regular schedule — which could be quarterly or monthly or even bi-weekly — regardless of market conditions. It allows an investor to ignore their gut instincts and maintain a steady flow of investment, even when markets are volatile. When markets tank, investors may be tempted to refrain from investing, and when there are upward spikes, fear of missing out can make investing more in top-performing assets seem like a good idea.

DCA doesn’t attempt to predict market highs or lows, but it does guide investors to continue to invest when prices are lower or when markets are exhibiting dizzying levels of volatility. It effectively prevents emotional responses and market timing to prioritize consistency and time in the market.

For example, instead of plowing all $6,000 in savings into a position at a perceived optimal time, an investor might instead invest $500 each month over the next 12 months for the sake of consistency.

Tactical buying can embodyWarren Buffett’s contrarian advice to “be fearful when others are greedy and greedy when others are fearful.” It’s also known as “buying the dip.”

The idea is to purchase a stock that is temporarily out of favor in the market if fundamentals indicate its overall outlook is strong. In such cases, a dip in share price is an opportunity, but it’s literally market timing. It’s best to use this strategy selectively within a broader plan, and - as with exit targets and DCA - it needs clearly defined rules.

Such rules might require investing an additional $1,000 in a fund when its share price drops more than 10%. This may counteract an investor’s natural urge to invest in a rising security, again removing the emotion from the investment decision.

As a long-term investor, sooner or later you will experience market volatility, but having a predetermined response in place can blunt its impact. Dollar cost averaging, tactical buying and exit targets can allow investors to maintain their exposures while managing risk.

These techniques can allow you to prepare for a range of outcomes using a rules-based methodology with the goal of maintaining a focus on your long-term financial health. Qtrade’s portfolio analytics tools can help you evaluate your investment strategy, monitor your progress, and make informed decisions tailored to your goals.