The Often Neglected Exit Strategy In Forex Trading
Many forex traders invest an extensive amount of time in honing their entry strategies. There are numerous articles out there on finding the right entries, risk, and money management. But what good is a great entry if you aren't securing adequate profit from the market movement? Exit strategy is arguably even more important than entry. Traders hover around barely profitable because they have half of the equation down but have yet to perfect their exits. So let's take a look at some exit strategies that can help you take more pips out of the market!
Fire And Forget Take Profit
A Fire and Forget exit strategy is useful to traders who aim to take consistent profits. That may be the scalper who wants to take 1.5x their risk in profit on each trade or the long-term trader who wants a 3:1. Fire and Forget works great for traders that do not want to be sitting in front of their charts waiting and waiting for the proper entry and exit.
This strategy works best with a consistent target profit in mind. An often cited rule of thumb is for the forex trader to attempt to take 2:1 reward to risk on every trade. We can easily adapt that rule to Fire and Forget.
The process would look something like this:
- One of your entry signals appears.
- Count the number of pips to where your Stop Loss will be placed.
- Double the Stop number and add to the entry to determine where the Take Profit will land.
- Look for any significant points of Support and Resistance on that time frame and the next highest.
- All clear? Fire and Forget! Trading into heavy S/R before your Take Profit will be hit? Sit it out.
Aggressive Advancing Stop Loss
An Aggressive Advancing Stop Loss is suitable for traders that have jumped into a momentum based trade that won't last for very long. These kinds of trades include Break Outs and News Trading. Volatility is high shortly after these events but often acts like a flash fire. It's there and then disappears in short order. Get in on the right side and you can ride that momentum to profit. The key to collecting profit from these kinds of movements is leaving enough room to breathe while protecting each pip you gain.
An aggressively advanced Stop Loss will move from the initial location to just behind each candlestick after it closes. This method is helps to minimize the potential for a loss on a much lower time frame. The trader should not strive to stay in a trade that is riding momentum off of a specific event for an extended period because over-extension is common. It's not uncommon to see a price run 100+ pips and then double back for 100+ pips. An aggressive Stop Loss allows you to capture a significant portion of that major movement but avoid retracement if it occurs.
What if you want to use this as a solid, long-term entry signal? News events are great catalysts to start trends but you shouldn't take the event as a signal of things to come. Wait for the pair to print a new entry point that is unrelated to the news event movement.
Remember- movements off of news events are more reactionary than anything else.
Aiming for Support/Resistance
It is always a good idea to see what lay ahead on the path before entering any trade. Trading into a Support/Resistance area is typically not a good idea if they have been consistently honored recently. Conventional thinking stipulates that the trader try to take at least their minimum profit level before hitting 80% of the way to the level. Why not the level specifically? If a level is going to be honored, momentum often tapers off before price reaches S/R. That can set the pair up to reverse after wicking near the S/R level.
There are a few different strategies for handling this potential roadblock to profitability.
1. The trader can close out a chunk of their trade when heading into the level. A small portion of the position is allowed to ride in the event that it pushes through the S/R level and continues on to greater profit. The trader may then choose to re-enter the position.
2. The trader may let the entire position ride into the level if they have already secured a significant profit that is locked in by a Stop Loss. This can be an alright choice with good Risk Management. The trader should avoid this choice if they have recently entered the trade and not secured their minimum target yet.
3. An exceptional signal that appears will not have as great of a luster if it is running straight into a S/R level. The trader can also opt to execute a much smaller trade than typically would with an initial signal and add to the position as it prints new strategy specific entry criteria. This style of entry and building a position is often referred to as "Pyramiding".
Let It Run Or Targeted Exit?
Exit strategies fall within two camps of thinking for the most part- letting it run and targeted exits. The choice is ultimately going to fall to the individual trader's risk tolerance and how exactly they want to approach their trades. Long-term trend traders are typically in the "let it run" camp while short-term traders use small, targeted exits to steadily build profit. Both have their merits and flaws.
The trader that "lets it run" is leaving themselves open to a number of market conditions. If something major happens in the world or there is an announcement you underestimate then your position can rebound easily without you seeing it. Letting a position run requires a fair amount of attention and good risk management skills so your account doesn't tank because of errant movements that you weren't ready for. Even still, this is a great choice for traders that do not seek to place many trades- just a few, highly profitable ones.
A targeted exit is more suited to short-term traders or people that want to minimize exposure in the forex markets. Price hits a certain point and boom, you're out and on to the next trade. This method takes a lot of the extended analysis of deciding whether or not stay with a position out of the equation.
Neither approach is "better" but they are suited to different trading styles. The right one for you is going to depend on your goals, strategy, risk tolerance, and money management style.
Do I Need A Set Exit Strategy?
YES! 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've made meaningful gains, it may be time to take a closer look at your money management and exit strategy criteria. Knowing how to keep what you earn is arguably more important than any other aspect of your forex trading.
This post was written by Dennis Heil, a private forex trader from Ventura CA. You can read more articles from Dennis over on his MahiFX author page.
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