By Adinah Brown
There are two crucial decisions to make when you trade fx: when you enter and when you exit. The term “trade exit” refers to the way in which a trader manages his Stop Loss/Take Profit target levels, in order to end a live trade. Before we begin to discuss the best ways in which a trader should exit a trade in order to minimize losses and maximize profits, here are some things you need to know:
1. Don’t be greedy. You will never be able to squeeze every single drop out of every trade. Think of the saying “bulls and bears make money, but pigs get slaughtered.”
2. Losses are part of the deal. Sometimes, you are going to have to accept the fact that not every trade is a winner, and developing a plan to deal with losses will help you avoid blowing your account while hoping things will turn around.
3. The market will not move in your favored direction forever. This goes back to point 1, don’t be greedy. Learn when to take your profits.
4. You’ll win some and you’ll lose some, but you are still a profitable trader as long as you win more than you lose.
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Now let’s get to the nitty gritty. Five ways in which to successfully exit a trade:
Stop losses. Determine the amount of trading capital you are willing to risk on any given trade. Place a stop loss, and when you have lost that amount of money, get out. Setting stop losses and understanding volatility are two key factors in proper risk management.
Trailing stop. One of the best known techniques for profit extraction, a trailing stop allows you to set a certain amount of money as a trailing stop, so if a trade moves in your favor, the trailing stop moves proportionately in the same direction, but if the trade moves against you, it pulls you out, essentially allowing your profits to run through, but not your losses.
Price target. Particularly useful for traders who are unable to constantly monitor their trades because they allow you to walk away knowing that eventually, either your stop loss or your take profit order will be filled, price target is used for trading chart patterns, with the price target being based on the pattern’s size.
Let’s say you open a trade with a risk of $100, and set your target at $500, you know that your reward outweighs your risk 5:1. Use Fibonacci Extensions or support/resistance levels to set price targets, so in the event that the price of a currency is struggling to rise (resistance), you can place a price target right under the area of resistance.
The why is gone. Even if you are in a profitable trade, if the reasons for which you entered, disappear, then this may be an indicator to get out. If the indicator you used gave you positive signals to enter, but you see the indicator flip, the trends may be over, so take your profit and find the next great trade.
Something better came along. If you find something better, with a better probability of success, there is no shame in jumping ship, selling your current position and opening a new, more promising one.
The key to a successful trade exit is to have a plan to get out, even before you get in. Once the trade goes live, so do your emotions, so establishing an exit strategy before you open a trade is a key ingredient in your risk management plan.
About the Author:
Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.