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How to choose an Exit Point in a Forex Trade

An 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. In contrast, it is important for traders to learn the difference between order types and how the order execution takes place.

Effective ways to find a Forex Exit point

While 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.

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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 stops

A 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.

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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 indicator

This 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.

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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.


How to Develop an Entry and Exit Strategy​

When it comes to developing an entry and exit strategy in Forex trading, there are several factors that need to be considered. It’s important to decide what type of trader you are, as your trades will be decided upon time horizon and potential risks. If you’re a day trader or a short-term one, then you’ll need to monitor your trades carefully and strictly identify your entry and exit points. But if you are trading long-term positions, you shall be more patient, as your gains will be more significant.

Another factor to consider is how much you are willing to risk. When you calculate your risks, you identify the level of acceptable losses before trading. This will help minimize any possible losses while keeping you safe from stressful trading.

For short-term traders, a lower risk ratio is more favorable as they make money on the volume of winning trades. On the other hand, long-term investors may prefer a higher risk ratio as they seek to maximize profits for each position.

You may also need to keep your strategies simple and follow trends; trade with the market, not against it. Setting your exit point is more important than entering as your profits depend on how you leave the market. Consider testing your entry and exit strategy, and never forget to use a stop-loss.


Testing your Forex Entry and Exit strategy

The moment you think you have a potential entry and exit strategy, you have to find an appropriate environment in which to test it. It may be advised to practice implementing a strategy on a demo account, but we do not recommend it. The reason is that a demo account does not reflect the real market conditions.

In most cases, demo accounts automatically submit orders to the market without considering slippage, as they would in a real trading account. Traders who test their entry and exit strategies on a demo account are often disappointed when they realize that in real circumstances they don’t work and end up losing money because of it.

As we mentioned before, the feeling of entering and exiting the market is an extremely important element for many beginners, and testing your strategies without it is not really valid. Instead, we suggest you test your strategy in a real environment, but with a small amount of money, like a Cent account.

Original Article: How to develop an Entry and Exit Strategy in Forex Trading
Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.
 
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