Refining Your Forex Exits And Banking Profit
Traders put a lot of effort into finding the right entry points for their forex strategy, but many do not put nearly the same sort of effort into figuring out how to exit those trades and lock in profits. Truthfully, each trader's approach is likely to be slightly different from others, however there are some commonalities that can be useful. The primary point to keep in mind when refining your exits is that your risk should provide adequate reward. If it does not, then why are you putting your money out into the market?
So, let's take a look at some ways to refine our exits and build profitability...
Support and Resistance Lines
Understanding Support and Resistance lines are an essential part of learning to trade. Even if you don't use them yourself, you should have a firm understanding of how a significant number of other traders use them. These levels will affect your profitability whether you acknowledge them or not because so many other people use them.
Many traders use these lines to set their Stops and Exits. This can cause a significant amount of pull back of a currency pair when nearing a strong zone – ‘zone’ being the key word. A price may bounce near a particular pip level instead of stopping right on it, so traders that do use Support and Resistance lines as a significant part of their strategy are advised to take this into account.
There are certain prices that always have the potential to become Support and Resistance levels. These are commonly referred to as Big Round Numbers (BRNs) and Very Big Round Numbers (VBRNs). A BRN will typically end in 0. So levels such as 98.40 or 1.3060 have the potential. A VBRN will end in 00. VBRNs have a much higher chance to become a Support or Resistance level particularly if has been an important one in the past. Levels such as 100.00 or 1.3000 will undoubtedly cause interruptions in price movement. They are simply too big and too important for the market to ignore.
Incorporating Support and Resistance
It is a good idea to check and see if you are trading into any significant Support and Resistance levels before placing a trade. Important historical levels or extremes can prevent a clear movement in favour of your profit.
If you want to use Support or Resistance as a profit level; aim before the level. A good rule of thumb is to position a Take Profit about 75%-80% from the current price to the actual level. That way you're out of the trade before the level has a chance to rebound. You can aim to ride through it but you will want to ensure your Stop is advanced to at least Break Even. There’s no sense in taking blind risks!
The same is true for using a level as a Stop Loss. Place the Stop Loss a little way past the actual level. That way if the level isn't broken you aren't dumped out of what could have been a profitable trade. On daily charts, 10-15 pips leeway is good, and you can scale down depending on the time chart you trade - a lower time frame means a narrower zone.
An Advancing Stop Loss And Take Profit
The common saying in trading is to "limit losses and let your profits run". That's a very glib statement that underscores the magnitude of getting that particular approach right. After all, if it were easy then there would be more details out there on how to do it, as opposed to just producing superficial statements of its importance. One very simple approach does require some active management on behalf of the trader.
Place a Stop Loss as you normally would.
When the position gains the amount of pips towards the Stop, advance it that many pips. So if the Stop is 100 pips behind, the position gains 100 pips, you then move the Stop Loss up 100 pips. Continue this approach until price reverses enough to take you out of the trade due to the Stop.
Why not just use a Trailing Stop?
A Trailing Stop is a great tool that serves a similar function if you don't have the time to check on the position regularly. The problem is that the Trailing Stop doesn't have any flexibility. To give it flexibility you would have to add more pips to the Stop level which could incur losses and make it harder to attain a good reward for your risk. (Making it 150 pips instead of 100, for example.) Manually moving the Stop means you can let it float out to a 150-200 pip gain before you move it; which is preferential so you don't get taken out of the trade too soon.
This approach works well in Trending markets but not so much in Range-bound conditions.
A Range-bound market should typically use a Stop that will be hit before the price point reaches either extreme of the boundaries. A Trailing Stop is also suitable because you're not expecting the price to rebound too much until it reaches the point where it is due to reverse completely.
Pyramiding Forex Positions
Pyramiding positions in forex is an incredibly useful tactic for maximizing profits and minimizing losses. It is more of a long-term approach and can be used to either add to or subtract from a position. Use of it often comes down to the psychology of the forex trader. Some view the approach as counter to the adage of "let your profits run". Their question being "Why would you scale down a winning position?" For some traders, it is seen as protecting secured profit rather than losing potential profit.
A trader that pyramids into a position starts with their basic amount on their initial signal. Once price confirms that it wants to continue moving in the direction of a clear trend, the trader adds more to the position and advances his stop. They continue stepping up their position in this way until they've reached their maximum risk tolerance with their strategy.
Pyramiding out of a position sees the trader take a portion of their profits out of the market as certain targets are hit. These targets are often placed in conjunction with the Support and Resistance zones that the trader is looking towards. They may decrease their position by 90% but let the rest run until it just hits an advancing Stop Loss.
In either case, pyramiding can provide a great way to help protect trading capital and profit if it appeals to the individual trader.
Utilizing Fibonacci Retracement And Technical Analysis To Find An Exit
Certain technical tools can help you find an optimal level to exit a trade. Fibonacci Retracement is one such tool.
Fibonacci numbers revolve around the idea that certain patterns repeat themselves throughout nature. The Retracement Tool helps apply that theory to chart patterns and the length of a particular price movement. Fibonacci Retracement took off as a technical analysis method due to the fairly accurate nature of the levels. Today, many people use Fibonacci levels as part of their technical analysis, which certainly contributes to making the indicator self-fulfilling.
The levels are plotted by placing the start and end points at the distinct ends of a price range. The indicator places the levels between those two points and the projected points in favour of the price action. The trader can use these levels as a visual reference to help make a decision on where to take profit that other traders will be looking at as well. That creates the potential for Support and Resistance zones to manifest in the currency pair.
A few points to note about Fibonacci:
• It works better on longer time frames.
Smaller time frames have more volatility and murkier chart movements as a result.
• Do not ignore long-term trends.
If you have a clean movement to the upside when the dominant trend is to the downside, there's a good chance price may not have enough steam behind it to move counter-trend in a predictable way.
• Be wary of mixing up your reference points for plotting levels.
It's not uncommon for a trader to plot their levels and "adjust" for a different movement. Those kinds of adjustments may not reflect what everyone else is doing with that particular price action in the charts.
• It is best to secure modest gains with Fibonacci Levels.
As is the case with anything in forex, if you consistently reach too far you will end up missing out on solid profits that could be ahead. The most common method is to look for an entry around the 38.2%, 50%, or 61.8% levels and then take profit at the 100% level.
• Fibonacci levels should not be used by themselves.
They do not offer an accurate enough picture on their own to trade from without some other indicator to show a coming reversal.
About Exiting And Securing Profits
These are but a handful of ideas and thoughts that are commonly employed by forex traders to help secure their profits. Many forex traders find themselves at the point where they are winning enough trades to break-even but cannot seem to pull ahead. Exit strategy movement is often the reason why. You should know exactly where you are aiming and what you want to attain from a particular trade.
In doing this, you should be able to increase the amount you bank on your forex trades.