6 Reasons to Exit a Forex Trade

11/11/2013 9:00 am EST

Focus: FOREX

Christopher Lewis, contributor to DailyForex.com and blogger at TheTraderGuy.com, explains six common signals forex traders use in order to know when to close out winning or losing positions.

One of the most difficult questions that a trader will ask themselves is when to take profits. This is a very complex issue, and as such, it has no one correct answer.

The correct way for you to take profits will be different than for someone else. It comes down to your trading style and time frame much of the time.

One very popular way to take profit in a successful trade is to put in an order in to close a position when the next support or resistance level is reached. This is one of the easiest exits to execute, as long as you understand support and resistance. The theory on this, of course, is the value will be able to avoid any whipsaw that the market may produce as it undulates along its course.

Moving average crossovers also serve as take-profit signals for some traders. This tends to be a favorite of the longer-term trader, as it is a trend-following system. This approach allows for large areas in which the market may move around, allowing you to stay in the trade for much longer periods of time. Depending on the time frame you’re using, this can be months or even years, believe it or not.

Candlestick pattern recognition is another form of technical analysis that will allow you to take profits at specific points. This is normally used in concert with support and resistance, as the two disciplines work very well with each other.

For example, if you are long a particular currency pair and you spot a shooting star, this is a signal that the trade may start to work against you. If you marry this with a serious resistance area, this gives you two very strong reasons to consider exiting the trade.

Conversely, if you are short a currency pair and see a hammer, this could be a trade that’s about to work against you. This is especially true if support is found in the same area.

Another common and an extremely simple way to take profit is to simply close the trade out at the end of the trading day. Daytraders do this every day so that they can sleep at night without the worry of the trade working against them.

As you can see, there are several different ways to take profits when trading forex. It’s going to come down to a lot of different reasons, including things such as time frame, but also other things such as forex trading psychology.

One of the best ways to determine the optimal exit strategy is to pay attention to your emotions when you try different strategies. The one that you feel the most comfortable with will typically be the best. This is because you will be much more able to follow and profit from it.

Know When to Take a Loss

When trading the FX markets, it is absolutely vital that you know when to cut your losses. By being able to identify when it is time to get out of a trade, you can keep your losses small, which will in turn allow you to continue trading when the market behaves as you predict.

By taking losses when they are small, the leverage that you apply on a trade will not come back to bite you as hard and can keep the account well funded. When you do not learn to cover your losses, it can lead to devastating losses that you will not be able to recover. In fact, this is one of the most common killers of forex trading accounts. But the biggest issue is to recognize when it is time to let go.

See related: Easy-to-Make Error Can Kill an Account

There are several different methods that you can use in order to determine this, but they all have one similar component: acknowledging a specific point on the chart that represents when your analysis isn’t correct.

For some people, this is a percentage of their total account. As an example, you might decide that any time you are down 2%, you are going to get out of the market, no matter what is going on. This is very common and allows you to have a specifically defined amount of loss you are willing to take.

Another very common method is to simply place a stop loss at a point that you feel represents when things are changing in the marketplace. For example, many traders will place their stop loss below the most recent swing low (in an uptrend) or the most recent significant swing high (in a downtrend).

By doing this, you are forcing the market to change recent trends in order to take you out. It proves to you that the market isn’t going where you thought it was, and you need to step back and rethink your position. You can then take the emotion out of the moment and begin to clearly see the opportunities that may or may not be there.

Some traders will simply base their exits on time. For example, daytraders will not carry a balance over to the next day, and will exit the market no matter what at the end of their trading day. This allows them to highly leverage their trades and sleep at night without worrying about spikes in the middle of the night going against them.

No matter how you decide to base your stop-loss placement, the common theme on all of these viable methods is that you have to be committed to adhering to their rules. Most traders that blow up their accounts all have the same issue: they broke some of their “golden rules,” and stop losses are without a doubt one of them.

One of the most important points to remember is that the markets are always there, and the next trade is just around the corner. You can go ahead and admit that you were wrong in your analysis, and close the trade. Doing so will save you money in the long run.

By Christopher Lewis, contributor to DailyForex.com and blogger at TheTraderGuy.com

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