October 14, 2021

5 Exit Strategies To Consider In Each Setup

 Most traders spend a lot of time and effort picking their trade entries but forget to plan their exits.

But what use is a well-timed and properly executed entry if you aren’t able to minimize your losses or maximize gains?

As you’ve probably learned through experience, the market doesn’t always go your way. Even if you’ve done all the fundamental and technical analysis, there’s still a chance that some unforeseen event happens or price simply does not react the way you thought it would.

Or what if it does?

In this favorable scenario, do you have a plan for locking in your profits or pressing your advantage?

Failing to plan is planning to fail, and this also rings true with trade exits. Emotions like fear and greed can get the best of you in the heat of the battle, so it’s best to have clearly defined exit strategies like these:

1. Initial stop loss and profit target

Ahh, the good ol’ basics. If you’re just starting out or if you’re the set-and-forget type of trader, then it makes sense to plan for your stops and targets from the get-go.

This way, you can rest assured that you’ll be out of the trade in case price reaches your invalidation point or that your gains will be booked if it goes your way.

Of course there are various ways to pick your stops and targets, and this depends on factors like your trading setup or ideal return-on-risk.

Some traders opt to keep an open profit target instead of setting a limit order, and that’s absolutely fine. What you shouldn’t forget is to set a stop loss!

2. Trailing stop

Let’s say that price goes your way, and you want to stay in the trade while protecting your profits and weathering the market noise all at the same time.

A trailing stop can come in pretty handy in this case. These are stop orders that are adjusted in your favor to secure more profits.

The rule of thumb for trailing stops is to move these in the direction of price action and not away from it.

In other words, you shouldn’t be using trailing stops to widen the leeway for loss in case price is moving against your trade.

3. Dynamic profit targets

As briefly mentioned earlier, some traders also adjust their profit targets in order to maximize winnings.

This can be used in tandem with trailing stops that can reduce your risk while also leaving the door open for more potential gains.

For instance, if you’re seeing a currency pair break one support level after another, you can keep adjusting your profit target lower in order to take advantage of sustained momentum.

It’s also useful in more advanced trading strategies that entail adding to your position but, as always, don’t forget to practice proper risk management.

You don’t want to lose it all (and more) in case the market suddenly turns against you!

4. Time stop

Ever notice if you’ve been keeping a trade open for what feels like forever and price isn’t really going anywhere?

It may be time to just exit and just allocate your trading capital to a better trading setup!

You might be missing out on much more profitable opportunities being locked up in a sluggish position when the market is just consolidating.

As with other types of stops, this also depends on your trading style. Day traders often set time stops to exit all trades at the end of a session. Some decide to close all positions before the weekend in case gaps occur.

5. Market exit

Lastly, there’s always the option of exiting your trades at market when conditions have changed.

Trade entries are often based on a certain set of premises – be it fundamental or technical in nature – so it’s reasonable to exit when those are no longer valid.

Take note, though, this approach is subjective and requires actively monitoring market conditions.

You don’t have to stick to just one type of exit strategy for every setup, and you don’t have to use all five either.

At the end of the day, it helps to remember that there’s no perfect exit, just as there is no point in obsessing over the perfect entry.

Instead, remind yourself to go for the exit strategy that works with the rest of your setup and just learn from the “better exits” as you review your trades.