How to choose an Entry Point in a Forex TradeAn entry point is the price level at which you decide to open a buy or sell position. A proper entry point can be defined through market analysis, and based on the trading strategy you adopt. It can maximize your profits in each trade, and that’s why professional traders follow strict rules to find the best entry points for their positions.
No matter what type of trading strategy or market environment you choose, you will always have to know how to enter the market, what type of confirmation to look for, and where your exact entry point will be.
Importance of choosing a Forex Entry pointEvery forex trader employs a specific strategy to trade successfully. It might be a supply and demand trading strategy, a price action trading strategy, an Elliott wave trading strategy or another. Though all Forex traders are familiar with potential trading areas, most do not have the perfect entry strategy to find those opportunities.
Instead, they trade blindly. It’s the same thing as crossing the street without looking both ways. While they have profitable trading strategies, they do not know how to determine entry and exit points. The following questions probably cross their minds frequently:
- What’s the best time to enter a trade?
- When and how should I enter?
- Have I entered too early?
- What should I do if I entered too early?
- How should I proceed?
Effective ways to find a Forex Entry pointThe more precise you set your entry and exit points, the more likely your forex trading system will succeed. While almost all entry methods work, each works differently depending on your set-up, psychology, objectives and the market type. Let’s discuss some efficient ways your can use to find an exact Forex entry point.
1. Candlestick PatternA candlestick pattern can be used by traders to pinpoint entry points and signals in forex trading. Candlestick patterns calculate the exact entry price at which to predict the future movement of the asset’s price. As a result, traders are more likely to succeed. Traders use it as a trigger for a trade, making it the most popular component of technical analysis.
Traders with extensive experience frequently use the engulfing pattern and the shooting star pattern. Below is an example of how the hammer candlestick pattern can serve as an entry trigger for a reversal of EUR/USD.
The hammer pattern alone is not enough to confirm an entry point. It is equally important to identify the entry point as identifying the candlestick pattern. By establishing entry points for a candlestick pattern, traders will risk less and have a greater chance of success.
2. Chart PatternThe use of chart patterns as entry signals is one of the most popular trade entry strategies. Chart patterns are price formations on a chart that are used to predict price direction based on historical data. Their analysis helps traders to identify bullish and bearish forces in the market. In this way, they can predict everything before it occurs, enabling them to ride it out.
Chart patterns are divided into three main types:
- Continuation Patterns: indicate the continuity of the ongoing underlying trend.
- Reversal Patterns: indicate a reversal of the current underlying trend.
- Bilateral Patterns: indicate that the price can move either way. They are very common during high volatility and uncertainty.
3. BreakoutsTraders use breakouts as entry signals for their trades more than any other tool. A breakout trade involves identifying key levels and taking advantage of them as markers. Using breakout strategies effectively requires price action knowledge. Breakout trading involves forex prices moving beyond a delineated level of support or resistance.
As a result of their simplicity, breakout entry points are suitable for novice traders. In the following example, we show a key level of support (red), following which a breakout occurs along with increased volume that further supports the move down. Entry is triggered when support is broken. As another option, traders look for a confirmation candle close outside the key level.
How to choose an Exit Point in a Forex TradeAn exit point refers to the price level at which you need to close your trade. You can exit the market with a gain or a loss. Setting a proper exit point is a crucial risk management tool to minimize your loss if occurred. Keep your risk/reward ratio low, most successful traders keep it as low as 1:2. The outcome of your trades will depend on how you choose both Take Profit and Stop Loss levels according to your trading plan.
The Take Profit level (T/P) is the profit level at which a trade will close, while the Stop Loss (S/L) is the price level at which a trade closes automatically when the market reverses. A Take Profit level is set above the current asking price if you are buying a pair, or below the bid price if you are selling. While a Stop Loss price is set above the current asking price for long positions, or beneath the current bid price for selling positions.
Effective ways to find a Forex Exit pointWhile the majority of Forex traders place a great deal of effort into spotting the right moment to enter a trade; the exit point of trade will ultimately determine how successful the trade is. Below are the three effective exit strategies that Forex traders should consider when attempting to exit a trade more profitably.
1. Using traditional Stop/Limit orders (Support & Resistance)Setting targets (limits) and stops at the same time as entering a trade is one of the best ways to keep emotions in check. Using a ‘stop loss’ is a better approach than entering without one and watching losing trades consume all of your account equity while wiping sweat from your forehead.
Read Stop Loss and Take Profit Explained for detailed insights
A trader should analyze the risk they are willing to accept before entering the market, then place a stop-loss order at that level, along with a target at least that many pips away. A stop-loss order will be activated and automatically closed when traders move in the opposite direction. A similar result would be achieved if the price reached the set target. Traders can exit in either case.
Remember that both stop loss and take profit orders will remain adjustable while your trade is active. However, setting both levels while opening an entry point is much preferable.
2. Using Moving Average trailing stopsA moving average indicator is well known for its usefulness as a filter when determining what direction a currency pair has trended. Trading opportunities arise when a price is above a moving average, while selling opportunities arise when a price is below a moving average. Alternatively, a moving average can also serve as a trailing stop.
It’s basically an idea that if a moving average crosses over price, it means the trend is changing. When this happens, trend traders close their positions. That’s why it might be a good idea to set your stop loss on a moving average.
3. Volatility based approach using ATR indicatorThis last technique uses the Average True Range (ATR). The ATR indicator is used to measure the price volatility by calculating the range between highs and lows. This chart tells traders how erratic the market is behaving based on the average range between high and low over the previous 14 candles, and this can be used to set stops and limits for each trade.
The greater the ATR on a given pair, the wider the stopping point should be. The reason for this is that a tight stop on a volatile pair could get stopped out too early. Additionally, setting too wide stops for a less volatile pair means taking on more risk than necessary.
An ATR indicator is universal since it can be applied to any timeframe. The stop should be set slightly above 100% of ATR and the limit should be set at least as far away as the entry point.
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Original Article: How to develop an Entry and Exit Strategy in Forex Trading | Learn Forex
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