In forex trading much is talked about the perfect entry point, the combining of various indicators and fundamental conditions to find the very best opportunity. Much less is talked about the strength of a good exit which is a shame since a good exit is just as important – if not more so.
An entry, for example, can do nothing to stop a wayward trade, whereas the exit has the ability to capture profits at any point or catch a trade before it goes wrong.
Guest post by FXTM
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, for example, it’s 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.
The trailing stop can be used to guard against losses and help to lock in profits as they occur. It can be used on its own or in conjunction with another exit. One of the difficulties when using the trailing stop is knowing how far away from the price action to set the stop as too close means you could take profits too early, while too far away and you might not capture any profits at all. Testing the trailing stop using past data is a good way of finding the right distance.
Using a price target is a good way to exit a forex trade so long as you pick a level that is realistic. If your price target is too far away, your trade might never reach it, which means you’ll probably end up losing money when the market turns back. Similarly, if your profit target is too close you’ll earn too little for the risk that was involved.
Technical levels such as pivot points are often great places to set as price targets for a couple of reasons. First of all, they use recent data so they adapt to market volatility. This means that the key pivot levels are all realistic profit targets. Secondly, pivot points are watched by thousands of professional traders. This means they are better at predicting turning points.
The Fibonacci and Elliot Wave Cycle are other technical indicators that can sometimes provide good exit points as is the ATR indicator which works better for day traders.
The Fibonacci is a mathematical sequence that manages to anticipate turning points with extraordinary accuracy while the ATR indicator is a good tool in order to gauge price moves. In forex, unless using a trailing stop, it’s best to be fairly modest when attempting to capture gains. Instead of looking for an arbitrary number of pips as a profit target, halving the ATR for the last 14 days can provide a more realistic expectancy.
Further reading: A strategy for hedging forex trades