In forex trading, it’s important to know when to jump into a trade and even more important to know when to get out. Exit strategies in forex trading primarily having in place a pre-determined plan of when to either count your losses and leave or take your gains. A lot of research on Australian forex traders shows that many don’t have a robust exit strategy.
What happens when you don’t have a good exit strategy in FX trading? You either end up taking up too many losses or exiting too early and missing profits. An exit strategy is especially crucial in trend-based FX trading. Sometimes the trend can reverse without warning and wipe out your gains in seconds.
Why You Need A Robust Exit Strategy in FX Trading
To Stop Losses in Good Time- You can set up what is called a stop-loss order to limit the number of losses you would incur were the trends to move against you. Novice traders often have their whole FX trading capital wiped out when they don’t set up this order correctly.
To keep your profits- This can be likened to cashing out when you are on the winning side. You can set up a limit order in your forex trading account to kill the trade when the trend is on your side and you’ve made your profits. Greed often leads to losses in FX trading so it’s also important to have a limit order at all times regardless of the trend.
Here are five tried and tested FX trading exit trading strategies you can implement today.
1. To Stop Losses- Implement A Trailing Stop on The Moving Average
In basic FX trading, you are expected that traders will jump into a trade as soon as the price goes above the moving average and exit when it’s on the other side. In this exit strategy, you will be able to implement a trailing stop whenever the trend is changing or about to change based on the moving average. You do this by exiting when moving average is above the price.
Pegging your stop losses on the moving average requires you to be actively engaged with the trades. This is so as you can move your stop loss in reaction to the price movements dynamically using the MA curve. However, some trading platforms allow you to automate the whole process albeit with the obvious risks associated with this proactive strategy.
2. Implement A Stop Loss Strategy Based on Trendlines
A stop-loss strategy is often used by experienced traders to cut their losses when the trade reverses. You can instruct your broker (often through the trading platform) to sell when the price hits a pre-defined low point. Alternatively, clever long-term traders use the trendlines to win against conventional traders who use static figures to place stop losses.
Depending on the platform you use, modern AI-based algorithms can detect trendline movements that are based on common stop losses. Make use of the right indicators to track the moving averages and exit when a trade exhibits a weakness.
3. Scalping Exit Strategies- Exit Early
Short term traders often employ a more proactive exit strategy that preserves small gains. This is at the expense of long-term gains that would be larger. If you are a scalper, you can use this strategy to rake in smaller profits before the masses catch on the trend. Using oscillators and Pivot targets, a scalper can identify a trade that shows early signs of strength. However, they will exit prematurely before other people join the trend and drive it down.
4. Exit Strategies Based on Volatility
Using the ATR, an FX trader can accurately judge the volatility of a trade and devise a winning exit strategy. It involves setting a wide or narrow stop and limit based on the perceived volatility of the trade. This strategy requires one to have a deeper understanding of the working son the ATR and reading volatility.
There is no pre-defined formula to winning in the FX market. Setting the right stops and limit will help you make profits and avoid monumental losses. Use the strategies outlined here to come up with a personal approach to entering and exiting FX trades.