It’s been said among professional traders; it’s not where you get in that counts, but where you get out that will make you money.
Entries are an important part of every trading system, but managing the trade through your exits is where the real money is made.
In this article, we will look at three exit strategies which are key for every Forex trader.
Exit Strategy 1: Exit at profit
- Dollar profit target – One of the exit strategies traders use is to set a dollar profit target. If you are looking for a simple exit, this is the one.
A good rule of thumb in trading is to know how much you are risking on each trade. For example, you might risk $500 on a trade. In this case, a reasonable dollar profit target would be at least $500 or a multiple of that.
- Pips or points profit target – In this exit at a profit, you set a specific number of pips or points (if you are trading indices).
Instead of having a $500-dollar target profit, you aim for a specific number of pips when trading Forex.
So your exit may be 30 pips away, so your profit target might be 30, 45 or 60 pips above your entry.
Once again, your exit at a profit should be a multiple of your stop loss size. This fits the old saying, ‘cut your losses off short and let your profits run’.
- Technical profit target – Using technical levels makes a lot of sense. Markets tend to have ‘memories’, and so previous resistance points can get hit and bring in profit takers. If you can see a clear double/triple top, you can put your stop loss on the resistance point of just prior.
You will notice in the chart of the EURUSD below, there is a double top resistance point, which was unable to be broken.
Exit Strategy 2: Exit at break even
In a perfect world, the trades you take all go on to hit your profit target. Unfortunately, you will notice this is not the case.
Frustration comes in when an in-profit trade turns around, goes past your entry point and hits your stop loss 30 pips lower.
This frequently happens around high-impact events or news announcements like non-farm payrolls or inflation (CPI) figures.
Let’s consider this example. You are expecting the US dollar to go higher because of market expectations the US Federal Reserve will increase interest rates. You go long USDJPY, and you are sitting in a handy profit in a short period.
But after a few hours, the trade reverses direction, and your open profit has vanished, and now you’re at break even. While there is a possibility the trade will trend in your favour, it could continue to fall.
Being a smart trader, you play the probabilities and move your stop to break even, giving some room to eke out your preferred profit target.
Exit Strategy 3: Exit at a loss
We all know that trading involves winning and losing trades. Even professional traders have their share of losing trades.
Most trend following systems win 30 percent of the time, so you must hold your nerve, cut your losses off short and let those profits run.
This is where you exit a loss will save your account.
- Dollar stop loss – We all have a tolerance for risk level. With a dollar stop loss, we are setting that value in advance and exiting when we have lost that amount.
In this case, you need to set an amount you are happy to give out as ‘rent’ when the position turns against you. Capital preservation is key, so set your dollar stop loss before you enter the trade. There is nothing worse than trading out of fear and letting your emotions rule your trading.
It is a great idea to use stop-loss orders whenever you can. That’s what they are for – to stop losses.
- Percentage stop-loss – This is the most commonly used strategy by professional traders. You risk a certain percentage of your total account on each trade.
The rule of thumb here is one or two percent risk per trade. Most professional traders – whether they trade shares, FX pairs, commodities or CFDs, set their percentage at one percent. This means they will risk one percent of their total equity in any one trade at any one time.
For example, if you have $20,000 trading capital, your stop-loss level set at one percent is equivalent to $200. When the trade moves against you $200 (including commissions), you exit the trade.
- Technical stop-loss – Just as you can use technical analysis to set your profit targets, you can use the same principle in setting your stop-loss exit.
Using a pure technical analysis approach, you can identify the support and resistance area and set your stop-loss level within that range.
It is important to tie your technical stop in with your maximum risk per trade. Find your technical exit point and make sure you are not risking more than one to two percent of your capital if the trade turns against you.
So there you have three exits to consider as part of your trading strategy. Play around with them, apply them to your charts, back test it in combination with your entries and see which ones work best for you.
Good luck with your trading.