It’s been said by many professional FX Traders that where you get out of a trade is more important than where you get in. Obviously the entry point is critical, but your exit strategy is the difference between having a long career in FX trading or a very short one. The primary reason is that if you pick a random place to exit or use emotions to “get out” when “it feels right” you have absolutely no way to objectively measuring the accuracy of your trading plan.
So let’s get to it. FX traders have access to many indicators and as I have found out the hard way, one can be overwhelmed with the plethora of choices you have available to you. There isn’t one strategy that is better than another, however, it’s a fact that you better have one and you better stick to it all the time.
The most frequently used tools to exit a trade are moving averages and Parabolic SARS. They both keep you in a trade for a substantial move, especially when the initial move was a spike up or down. The downside is that they can penetrate the exit price and then reverse back to the previous trend; therefore limiting your profit. But used consistently, it’s an objective way to let the market take you out.
Another strategy is to have a predetermined price to take 1/2 your position off and then move your stop to breakeven on the balance. This has a very nice psychological advantage as once you hit your initial target, you are then playing with “the house’s money “. Then you can use another tool to take you out of the balance as the market moves your way.
A third more aggressive strategy is to build a position by initially buying a 1x position, then as the market moves in your favor, you pyramid a 2x, or 3x position and move your stop up accordingly to breakeven the entire position. This has the advantage of producing the largest pip gain on a move that had follow through and stays in the current trend. The downside obviously is that you may get to that 3x position and a pullback takes you out of trade at breakeven. But it does give you the best reward: risk ratio over a single position.
These strategies can be used on different timeframes depending on whether you are a day trader, swing trader or have a much longer time horizon. The bottom line is that by using a predetermined exit strategy you are not trading on emotion or impulse, but will always have an objective way for the to take you out of the trade.
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