Having an exit strategy is just as important as planning for entry signals. Why? At the end of the day, your trade is only as successful as the upside you secure. How do you secure it? By knowing when and how to exit the trade.
If you haven’t given exit strategies a thought, here are three of the most popular ones to get you started.
Time-based exits
Using a time exit strategy means defining the maximum amount of time you spend on a particular trade. That is to say, if the trade doesn’t turn out to be successful after a certain period of time, it’s best to exit the trade and scout out another opportunity. How much time you give a trade is up to you and your trading style.
Time-based exits are known to work well in sideways markets or in trades where the trend is moving against you. While it may be considered a simple strategy, setting a time limit can help you curb your losses.
Stop-loss/Take-profit
The bottom line is that there are really only two ways to get out of a trade: by making a loss or by making a gain. That being said, one of the most sound exit strategies is using stop-loss/take-profit.
The purpose of stop-loss is to keep a trader in a trade until the setup is no longer valid. Essentially, stop-loss helps limit losses. Take-profit, on the other hand, allows traders to secure profits by closing the trade once the profit target is met. It takes time and effort to learn how to calculate effective risk/reward ratios for stop-loss/take-profit orders, but it’s a skill every trader should master. Learn more about implementing this strategy in this helpful article.
Trailing stop-loss
Trailing stop-loss is a powerful tool that helps manage risk while optimizing potential upside. Think of it as a way to secure your gains while being able to accumulate more, and at the same time managing risk. To do this, you must set certain threshold conditions for both profit and loss. On the MT4/MT platform, this is calculated as a percentage. Trailing stop loss will close your deal when it has generated the indicated upside and the trend begins to reverse.
Say you have a long Forex position open, and the market is moving in your favor. Setting trailing stop loss will enable you to continue building on your gains until the trend starts to move in the opposite direction. You can read a detailed guide on using trailing stop loss here.
There are many different exit strategies out there — the ones mentioned above only begin to scratch the surface. Do your research, practice your exit strategies, and find the ones that work best for your trading style.
