– Review by James Stanley, November 24, 2021
Effective exit strategies:
- Traditional stop / limit (using support and resistance)
- Moving average trailing stop
- Using a volatility-based approach ATR
Traders focus a lot of energy on finding the perfect time to enter a trade. While this is important, it is ultimately where traders choose to exit trades that will determine how successful the trade is. This article discusses 3 exit strategies that traders need to consider if they want to exit trading.
Forex exit strategy №1: traditional stop / limit (using support and resistance)
One of the best ways keep emotions in check is to set targets (limits) and stops at the same time as the conclusion of the trade. This is a much better approach than entering without “stop lossand you need to wipe the sweat from your forehead when you watch how unprofitable trades consume the bill.
Thanks to a DailyFX study of over 30 million live transactions we discovered this setting a the attitude of risk to reward at least 1: 1 was one of the common traits successful traders.
Read the guide below for a summary of the main findings of this study:
Before entering the market, traders must analyze the amount of risk they are willing to take and set a stop at that level, putting at least as many risks bones away. If traders make a mistake, trades will be closed automatically at an acceptable level of risk; if traders are correct and the price reaches the target, the trade is also automatically closed. Any result provides traders with a way out.
Well-defined support and resistance in USD / JPY
Traders who want to go long will look for a price to bounce off support coupled with clear buy signals indicators. Since the price has temporarily fallen below the support, traders would like to place a stop just below the support level. The limit can be set at the resistance level, as the price has approached this level several times. For short positions this will be canceled and stops can be placed near the resistance with restrictions placed on support.
Forex exit strategy № 2: moving average trailing stop
It has long been known that A moving average can be an effective filtering tool in which direction a currency pair tends. The basic idea is that traders look for buying opportunities when the price is above the moving average, and looking for selling opportunities when the price is below the moving average. However, it may also be helpful to consider a moving average as a trailing stop.
The idea is that if the MA crosses the price, then trend shifts. Traders in the trend would like to close positions as soon as this shift occurs. This is why setting your stop loss based on a moving average can be effective.
The diagram above shows a long the input is above the breakout resistance, which is also above the 100-day simple moving average. The stop is 220 points from the moving average and the limit is 440 points to ensure 1: 2 the attitude of risk to reward. As the price rises, so will the MA, and the stop needs to be moved to where the MA is. This creates a safety net in case the price turns sharply.
Forex Exit Strategy №3: Volatility-Based Approach (ATR)
In this final technique is used Mean true range (ATR). ATR is designed to measure market volatility. Taking the average range between high and low for the last 14 candlesit tells traders how volatile the market is and this can be used to set stops and limits for each trade.
The higher the ATR on a given pair, the wider the stop should be. This makes sense because a hard stop of an unstable couple can be stopped too early. Also, setting feet that are too wide for a less volatile pair essentially takes more risk than necessary.
The ATR indicator is universal, as it can be adapted to anyone time frame. Just set your stop just above 100% of the ATR and set the limit at least the same distance from the entry point.
ATR indicator for Brent Crude oil marked in blue at the bottom of the chart and shows the highest average volatility, which peaked at 135.8 points. Thus, if the trader places a short trade, the stop and limit will be at a distance of 135.8 points from the entrance, while setting the risk of rewarding 1: 1. Placing stops around the ATR essentially acts as a stop volatility.
It is clear from the chart that in this case the risk ratio to the reward of 1: 1 closed the deal early. This emphasizes the importance of risk-reward ratios, as traders need to target more items with minimal risk, leading to a better risk-reward ratio.
Forex Exit Strategies: A Summary
- Remember that forex trading is more than just getting good records, because the success of trading will ultimately depend on where traders come out of their positions.
- New traders can strengthen confidence in trade having a trading plan which implements a clear exit strategy to close trades.
- Withdrawal strategies are just one part of a complete forex strategy. Learn more about ours best forex trading strategies.