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The Importance of Forex Exit Strategy
Written by: PaxForex analytics dept - Saturday, 25 February 2017 0 comments
Forex traders tend to focus a lot of their time and energy on their trade entries. While it is very important to know how and when to enter a trade, it is equally crucial to know when to exit the trade. Most people have a detailed plan and set rules on how to enter the market, but newbie traders often overlook the importance of having an exit strategy. Exiting a trading position at the right time and price is arguably more important than your entry order, because only when you exit you confirm your profit.
One of the most logical ways to exit a trade relates to the strategy that caused you to put on the trade in the first place. It stands to reason that you already should have planned your exit in advance so if you entered on a moving average crossover and it is usually best to exit on the opposite crossover. Likewise, if you bought on a breakout you should probably sell when the price breaks down. At the very least you should have some criteria laid out in advance for exiting a trade.
Risk is an important factor when investing. When determining your risk level, you are determining how much you can afford to lose. This will determine the length of your trade and the type of stop-loss you will use as an exit point. Those who want less risk tend to set tighter stops; and those who assume more risk give more generous
downward room. Another important thing to do is to set your stop-loss points so that they are kept from being set off by normal market volatility .
The correct way for you to take profits will be different than for someone else. It comes down to your trading style and time frame much of the time. One very popular way to take profit in a successful trade is to put in an order in to close a position when the next support or resistance level is reached. This is one of the easiest exits to execute, as long as you understand support and resistance. The theory on this of course is the value will be able to avoid any whipsaw that the market may produce as it undulates along its course.
There is no best way to exit a profitable trade. For some trades one method will work well but will fair worse on other trades. The key is to decide on a method and stick to it, potentially using some of these methods in conjunction with one another. By coming up with a game plan you will be able to see what works and what doesn’t, so you can make slight adjustments if needed. All these methods can help you let your profits run but will get you out if the price moves too much against you. You will never squeeze every penny out of a trade, but utilizing the exit strategies outlined here will help you capture the bulk of a move.