Most traders spend more time planning and contemplating entries than exits. While proper entries are important, most seasoned traders agree that trading success relies on how a trader exits their trades. A fact of forex trading is that most traders take their profits as a result of an emotional impulse instead of exiting the market at a pre-determined target or from a pre-planned exit strategy. As a result, traders who exit a trade on emotion typically take much smaller profits than they would like, while traders who exit a trade based on logic and discipline typically are very happy with the profits they take.
Establishing where to get out before a trade even takes place allows a risk/reward ratio to be calculated on the trade. Just as important as the profit target is the stop loss. The stop-loss determines the potential loss on a trade, while the profit target determines the potential profit. Ideally, the reward potential should outweigh the risk. While we can never know which trades will be winners and which will be losers before we take them, over many trades we are more likely to see an overall profit if our winning trades are bigger than our losing trades.
Exiting from a trade is arguably more important than the entry, as the exit is what determines the profit. By learning multiple methods for exiting a trade the trader positions them self for potentially locking in greater returns. There are several useful methods for exiting a position, all which are easy to execute and can be implemented into a trading plan. A stop-loss is placed at the time of the trade and figured out beforehand. There are potentially many methods for picking a stop-loss rate, but ultimately it must be at a place where the trader does not reasonably expect the market hit before putting the trader in a profitable position that warrants just reward for the potential risk taken.
One of the most successful ways for exitting profitable trade when determining exit points is to look at the reward/risk ratio of any trade. Applying a reward/risk ratio ensures well calibrated and pre-set exit points. If the trade doesn’t provide a favorable reward/risk, the trade is avoided, which helps eliminate low-quality trades from being taken. If the target (the “reward” portion of the trade) is reached on a trade, then the position is closed at the target price according to the strategy.
A number of traders fail to collect pips after entering into profitable trades because they do not have a consistent plan on how to keep their profits from disappearing back into the market. Every trader should have specific exit criteria drawn up in their trading strategy that will best compliment their trading technique and let them build their profit. The few exits presented in this article can be adapted to several trading strategies. If you find your profits slipping back into the markets after you have made meaningful gains, it may be time to take a closer look at your money management and exit strategy criteria.