The debate is ongoing – what’s more important to a forex trader”¦ The entry? Or the exit?
There’s no doubt that both are pretty important if you want to make money from the markets, however, it’s also true that most traders put a lot more thought into their entries than their exits.
A good exit, though, is invaluable as it can rescue a trade before it loses, or capture profits at just the right moment. Here are 4 different ways to exit your forex trades:
Guest post by FXTM
1 – Predefined exits
The most popular way traders exit their trades involves simply thinking of an arbitrary number of pips or a dollar value and then closing the trade when it hits that level. It makes risk management easier but it doesn’t have much logic to it other than that.
It’s actually quite a lazy way to approach exiting the market as it doesn’t involve any thought or analysis. Wouldn’t it be better to exit a market knowing you have done all you can to make sure it is the best exit possible?
Of course, you will never be able to predict the market turns exactly but it’s better to have a solid understanding of your exits than not. Exiting your trade via a stop loss should be a method of last resort. The real exit should come from your trading strategy logic.
2 – Back-tested stops
If you have back-testing program you can test to see what systems work on the markets. But it doesn’t stop there. You can also test out different stops and exits, optimising them to see which ones work the best.
By looking at two factors; maximum adverse execution (MAE) and maximum favorable execution (MFE), you can work out precisely when an exit ceases to be effective.
For example, the MAE may reveal that your trades never make any money once they have dropped by 20 pips. Brilliant! You can place your stop exactly 20 pips away and be safe in the knowledge that you have a good stop in place.
Likewise, the MFE may reveal that your trades rarely make money once they have hit 50 pips of profit. This would be the ideal place to exit your profitable positions.
3 – Pivot levels
Some strategies are complex and difficult to program into back-testing software, particularly short term systems that rely on gut instinct. Gut instinct is OK but you should still have a sound method for exiting trades.
On short term horizons, pivot levels, or more specifically S2, S3 and R2 and R3, tend to be great places to exit trades. Many professional day traders watch these levels so markets often hit these marks before reversing. They are also useful for stops, since stops can be placed just a few pips out of the range of the pivot level.
Further reading: How to handle a run of losses
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