When planning the upcoming trades, Forex market participants tend to focus on the entry point. In other words they are looking for the perfect timing to enter the market to gain the most profits. But the right timing is also important when it comes to exiting the trade - finding a moment to stop. Exiting at the right time can serve multiple purposes, including: optimizing the profit, minimizing the losses and managing the time spent trading. Today we will take a look at some basics of Forex exit strategies and learn how to pick the right strategy that will fit your requirements and capabilities.
Setting Up An Forex Exit Strategy: Some Factors To Consider
The exit will always largely depend on the amount of holding time - the period during which a trade remained open. You might already know that there are multiple categories of traders, such as day traders, swing traders or position traders, for example. Depending on the general trading style, each category will hold their trades open for different periods of time. This way a day trader might close several minutes after opening, while a position trader will wait for at least a few days. With that said, the trading style does not define the exact moment for an exit and there are additional ways to figure that one out that apply to nearly all strategies. We have broken them down into two categories: the most common Forex exit strategy approaches and the most effective ones, according to our observations.
Common Forex Exit Strategy Approaches
Stop/Limit Using Support And Resistance. Support and resistance levels are virtual limitations on the chart, which are believed to contain the price within their borders. The support limit is located below the chart movement and is meant to define a point where the price will bounce back up after the down movement. And the resistance does the same for the top of the chart - the price is likely to head back down after hitting this limit. At first trader would find an optimal spot for placing a stop loss order by comparing a number of charts, and then using the pre-calculated risk to reward ratio the stop/limit will be determined. For instance, if the stop loss is located 50 pips down from the entry point and the risk to reward ratio is 1:2, the limit can be placed 100 pips above it and together they will create distinct exit points.
Trailing Stops Based On Moving Averages. This approach requires more direct attention from the trader, as it consists of placing multiple stop losses in accordance with a Moving Average. This Forex exit strategy is built on a theory that once the price crosses the MA line, it is an indication of a shift in the trend and that would be a great exiting point. The further calculations are very similar - set up stop loss depending on the risk to reward ratio and keep adding the new ones as the average progresses.
Volatility-Based Strategy. By working with a volatility indicator, such as ATR (average true range) a trader can get an idea of the significance of price swings within a chosen period of time, and based on that use the automatically predetermined point to exit the trade. In this strategy stop loss set to the pip equivalent of 100% ATR. For example, if the range is indicating 30 pips and the risk to reward ratio is again 1:2, the limit will be set 60 pips above the entry point.
3 Best Exit Strategies for Forex Trading
We already took a brief look at the most commonly used trading exit strategies and, as you have probably figured, they are not as complex as it might seem. Now we are going to focus on somewhat complex types of exit strategy Forex that also proved to be considered very effective, and therefore - the best.
Price Action Channel Exit Strategy. The price action channels are often used to determine the strength and momentum of a trend, and allow the trader to get the most out of that trend when used as one of the trading exit strategies. In order to set up the channels set up two moving averages upper and lower, with the parameters being: period 5, shift 0, smoothed method, high/low price respectively. Hold the trade until the moment a bar closes on the other side of an opposite channel. It also goes without saying that the MA period can be adjusted in accordance with your overall style: 1 for intraday traders and 15 or 30 for swing traders.
Fibonacci Extension Exit Strategy. Fibonacci indicator is one of the most effective technical analysis tools, that once again proves that Forex is more math than luck. There is a set of ratios, calculated via Fibonacci sequence methods that nearly always guarantee a trend reversal and can be used as exit points. Some of these levels are: 123.6%, 138.2%, 161.8%, 261.8% and 361.8%, you can use the especially designed drawing tool to indicate them on the chart and use the points of crossover between the levels and the price movement as exit points.
Exiting on Previous Day High or Low price. Here the main factor behind the price movement is human psychology. Traders tend to react to certain scenarios in the market in accordance with the majority. In simple words: a lot of Forex participants are very likely to go with the flow. This way the exit point is located near the previous day’s high (just slightly under it) is one of the most optimal solutions for a profitable trade.
Forex Exit Strategies: a Summary
The most important outtake from any of the trading exit strategies, both basic and complex, is that the exit point should be just as carefully planned and prepared for as entry. After all, exit is where you can see the results of your work - whether positive or negative. And as mentioned above, having a thought-through approach goes hand in hand with having an overall planned out strategy and a decent level of skills and preparation.
