Exiting a trade when it’s profitable requires one of these three trading strategies
- EFFECTIVE TRADING EXIT STRATEGIES INCLUDE THE FOLLOWING:
- FOREX EXIT STRATEGY NO. 1: THE CONVENTIONAL STOP/LIMIT (INVOLVING SUPPORT AND RESISTANCE)
- FOREX EXIT STRATEGY NO. 2: STRATEGY FOR EXITING THE FOREIGN EXCHANGE MARKET BASED ON MOVING AVERAGE TRAILING STOPS
- FOREX EXIT STRATEGY NO. 3: VOLATILITY-BASED APPROACH USING (ATR) IS USED IN THE FOREX EXIT STRATEGY
- A BREAKDOWN OF DIFFERENT FOREX EXIT STRATEGIES
EFFECTIVE TRADING EXIT STRATEGIES INCLUDE THE FOLLOWING:
- The traditional stop-and-limit approach (which makes use of support and resistance)
- We are leaving behind the moving average stops.
- A technique based on volatility that makes use of ATR
Traders devote much effort to determining the optimal moment to initiate a deal, Despite the significance of this fact, the final factor that will establish the trade’s level of success is the location at which participants decide to close their positions, This article focuses on three different trading exit techniques that traders should consider to successfully get out of a transaction.
FOREX EXIT STRATEGY NO. 1: THE CONVENTIONAL STOP/LIMIT (INVOLVING SUPPORT AND RESISTANCE)
At the same time that a transaction is put into, setting objectives (limits) and stops might be one of the most effective techniques to keep emotions under control, This strategy is far superior to initiating a trade without a stop loss and having to wipe the sweat from your forehead as you watch losing transactions eat away at the account equity.
The analysis that DailyFX conducted on more than 30 million live transactions revealed that one of the characteristics that successful traders share is the practice of maintaining a risk-to-reward ratio of at least 1:1.
An overview of the most important results from this study may be found in the following guide:
Before entering the market, traders should choose the degree of risk they are prepared to take and then place a stop loss order at that level while simultaneously establishing a take profit order at least that many pips farther away, If the traders are incorrect, their transactions will be canceled automatically at an acceptable risk level, Still, the trade will be canceled automatically if the traders are accurate and the price achieves the target, Traders have an escape available regardless of the result.
Clear-cut points of support and opposition in the USD/JPY market
If a trader wanted to go long, they would wait for the price to rebound off the support level while searching for unambiguous buy signs from the indicators. Because the price has briefly broken below support, traders may attempt to stop only slightly below the level at which support is located. The resistance level is an excellent spot to set the limit since the price has come close to testing its strength on several occasions. This will be inverted for short positions so that stops may be set at resistance and limits can be placed towards support.
FOREX EXIT STRATEGY NO. 2: STRATEGY FOR EXITING THE FOREIGN EXCHANGE MARKET BASED ON MOVING AVERAGE TRAILING STOPS
It has been common knowledge for a long time that a moving average may help determine the direction in which a currency pair has trended, When the price is higher than a moving average, traders search for chances to purchase, and when the price is lower than a moving average, traders look for opportunities to sell, This is the fundamental concept of moving average trading, However, another important strategy is considering a moving average as a trailing stop, This may be done.
If a moving average (MA) crosses over a price, the conventional wisdom is that this indicates a change in trend, When this change has occurred, trend traders will want to finish their positions as soon as possible, As a result, basing your stop loss on a moving average might be a beneficial strategy.
The chart just shown to you illustrates a long entry that occurs above a break of resistance and above the 100-day simple moving average. To maintain a risk-to-reward ratio of 1:2, the stop-loss order is put 220 points away from the moving average, and the limit order is 440 points away. When the price increases, the moving average will go up, and the stop-loss should be adjusted wherever the MA is. This provides a cushion if the price suddenly shifts.
FOREX EXIT STRATEGY NO. 3: VOLATILITY-BASED APPROACH USING (ATR) IS USED IN THE FOREX EXIT STRATEGY
The last strategy uses a metric known as the Average True Range (ATR), The ATR was developed to analyze the volatility of the market, Traders are informed of how unpredictable the market is acting, and this information may be utilized to establish stops and limits for each transaction, This is accomplished by calculating the average range between the high and the low over the previous 14 candles.
If the ATR of a particular pair is high, then the stop should be set farther away from the market, This makes perfect sense, given that a tight stop on a volatile pair risks being stopped out too soon, In addition, placing stops that are too far apart for a pair with a lower degree of volatility exposes the trader to a greater risk than is required.
The ATR indicator may be considered universal because it can be customized to work with any period, Just place your stop order above 100% of ATR and your limit order at least the distance from the entrance point, That’s all there is to it.
The most extraordinary average volatility reached a height of 135.8 pips, as evidenced by the ATR indicator for Brent Crude oil, shown in blue at the bottom of the chart, When a trader makes a short trade, the stop and limit positions will be placed 135.8 pip distances away from the entry point to achieve a risk-to-reward ratio of 1:1, Setting stops close to the ATR has the same effect as setting a stop for volatility.
The chart shows that, in this instance, a risk-to-reward ratio of 1:1 should have resulted in an early exit from the transaction, This highlights how vital the risk-to-reward ratio is, as traders should aim for more pips while taking as little risk as possible, resulting in a superior risk-to-reward ratio.
A BREAKDOWN OF DIFFERENT FOREX EXIT STRATEGIES
- Remember that trading success will ultimately rely on where traders leave their positions, Therefore, it is essential to remember that forex trading is about more than simply having a solid entry.
- A trading plan with a specific exit strategy to close off transactions is one way that novice traders may increase their confidence in the trading process.
- Exit strategies for trading make up simply one component of a comprehensive forex strategy. Learn more about the most successful forex trading tactics we provide.
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