In trading, profit or loss is realized when you close a position, not when you open it. A perfect entry with a bad close gives you no profit and could even bring you heavy losses. On the other hand, a mediocre entry with a good exit will generate profits or controlled losses.
Strategies for Exiting a Trade: Complete Guide for Investors
As you just saw in the introduction, improving your starts will have an immediate impact on your results. To help you advance as a trader, we have prepared this guide that explains in detail how to improve the closing of your operations.
How to Exit a Trade
First of all, you must remember that in trading you are not always right. No matter how good a system is, there are always going to be some trades that close in losses. There are three ways to close a position:
- The price has reached the profit target: you close the trade in profit
- The price has reached the stop loss: you close the trade with a small loss compared to your capital
- Market conditions have changed: the price takes much longer than expected to reach its destination or some signal appears that cancels your previous analysis. For example, a reversal pattern, a trendline breakout, or an entry signal in the opposite direction on your indicators. This shutdown results in lower-than-planned profits or losses
Orders to Collect Benefits
As with entries, closing orders can be at market or limit:
- Limit Take Profit Order: The exit order is placed at a specific price when you execute your entry order. Once the price reaches it, the trade is automatically closed
- Stop Loss Limit Order: Similar to the above, but used to control losses when the price moves against you. It is launched together with your entry order and is executed automatically and at the price that you determine when the quote reaches it
- Market close: you must execute the close manually, buying or selling, when the price reaches the zone that interests you or when you detect an exit pattern on your chart
In moments of very high volatility, the price can advance without giving time for limit orders to be executed. Find the best Forex brokers in our list.
That is why it is said that these types of orders guarantee the price at which they are executed, but do not guarantee the execution itself.
Instead, market orders are always triggered, although there is no guarantee that they will be triggered at the exact price you see on your platform.
What should be taken into account in the Exit Strategy?
How long can I leave a trade open in forex? Whatever you want, but the most important thing is that, when executing your starts, be consistent with your strategy. This means, doing things as you had planned without getting carried away by last minute impulses. Your exit strategy should always have a stop loss.
It can be an order placed at a certain price level or it can depend on the signal of an indicator.
Remember that this tool allows you to control your losses. Once you establish where and how it is placed, do not alter this decision.
Traders who do not accept losing tend to be undisciplined with stops and move them to avoid negative closings. This causes some trades to breakeven again and reduces their losing trade ratio. But when these arrive, they end up being very high amounts, which prevent them from being profitable. Sometimes they even lose all the principal in their accounts.
On the opposite side are traders who move their take profit orders or close their winning trades early. The latter do so for fear of losing what they have won. The former, because they become greedy and want to earn more. Both in one case and in the other, these are behaviors in which the trader is carried away by his emotions and does not follow the plan.
If your trading contemplates exits because market conditions have changed, do not use this argument to justify your emotional behaviour. There must be a clear and unequivocal signal (or several) that support this decision.
For example, the appearance of a reversal pattern in the price or a specific signal in an indicator. This must be included in your strategy beforehand.
That being said, keep the following factors in mind when planning your profit exits and stops:
- Ratio b / r and % of success of your system: for your strategy to be winning in the long term, you need to maintain an adequate proportion between what you win when you succeed and what you lose when you fail
- Loss tolerance: is related to the previous point. If losing emotionally affects you, you can adjust your system to have a large hit percentage, with a stop loss further from the entry than the exit for profit.
- Trading Style – Depending on whether you are scalping, swing trading, or long-term trading, you can either place your exits tighter or look for broader price movements
- Volatility: in periods or assets with a lot of volatility, you should place the stop losses further away to prevent them from jumping due to noise. You can measure volatility using indicators such as ATR or Standard Deviation
Exit Strategies for Forex Trading: When to Get Your Profits?
Depending on the strategy you use, you can determine when to close your trades in profit or loss by following the following systems:
- Signal of an indicator or pattern in price: Both the exit for profit and the stop loss are determined by the signal of an indicator or the appearance of a pattern in price action. With this system, it is difficult to calculate the b/r ratio of a trade in advance
- Predefined Target and Stop: Exit and stop orders are placed at the time of entry, at precise price levels. It is also necessary to analyze the price structure, to avoid placing the exits for profit too far or the stops in areas where the price is very likely to return.
- Trailing stop: the stop loss follows the price as it advances. It allows you to capture broader movements in favor, although it is difficult to analyze the b/r ratio of operations before entering them
It is best to take more than one into account to be more flexible and be able to adapt to market conditions. Either way, remember to backtest as thoroughly as possible before you start using any of them for real money. Find our brokers with Demo Accounts.
Three Exit Strategies You Should Know
Here are 3 strategies to plan your trade exits:
- Support and resistance: In bullish trades, place your stop below a support and your take profit slightly below a resistance. If the price reaches the stop loss, it means that a relevant support has been broken and there is a good chance that the price will go against you many pips (See how to count Pips). At the same time, putting the price before a resistance allows you to profit even if the price bounces off it and turns around. For bearish trades, you can look for the opposite: take profit above a support and stop loss above a resistance.
- Moving Average Crossover – If the price is developing a clear trend, but starts to retrace and crosses a fast moving average (6-20 period) then a reversal or broad correction at a higher time level may be in progress. It is a good time to close your position
- Decrease in volatility: Trend impulses are often accompanied by an increase in volume and volatility. As these return to the usual indices, the trend loses strength. If you have entered the market at a breakout point or at the start of a trend, it is a good idea to exit when you see that the ATR or Standard Deviation indicator has stopped marking highs and has started to move lower.
Why Are Exits in Trading So Difficult?
The main reason that makes exits so difficult for many traders has to do with their expectations. If you constantly strive to find the perfect start, you will never be happy with your results and you will tend to make mistakes.
Traders often get frustrated by exiting the market too early or too late.
- In the first case, it hurts them to “leave money on the table.” They tend to think that if they had closed later they would have earned more.
- In the second, they return part of the gains and would have avoided it if they had closed their positions earlier.
The reality is that it is practically impossible to know the optimal point at which to exit a position.
No matter how good you are at analyzing a market, you cannot know for sure what the price is going to do.
Do not think about capturing a whole trend movement and accept that there will always be a part left untapped. Focus on consistently running the output your system tells you to. If it is well designed, it will pay off in the long run.
Methods to Take Profits and Stop Losses
Three of the maxims that any successful trader applies are:
- Protect your capital
- pay yourself first
- let the profits run
Respecting them to the letter can make the difference between being a losing trader and a breakeven or between being a breakeven and a winner. All 3 refer to the importance of cutting your losses and saving your profits as soon as possible, to avoid returning them to the market.
Here are some ideas to help you improve your forex trading results:
- Use of stop loss: it is the basic tool to protect your capital and not risk more than you should. If the price goes against you abruptly and you do not have a stop, your losses can be high
- Stop loss location: The stop loss should be placed in a consistent zone that the price will only reach if the current trend changes. For example, behind the minimum marked by the previous pullback or behind a resistance or support. If your b/r ratio forces you to place it at a random point in the middle of the momentum, you should reduce your position size to place the stop in a more logical area or discard the trade.
- Do not remove the stop loss: if the price is going to turn around and your stop is about to be triggered, do not move it. This will only make you lose even more and negatively affect the b/r ratio of your strategy.
- Do partial closings: One way to “pay yourself first” is to start collecting benefits as soon as possible. If you enter the market with more than one lot (or mini-lot or micro-lot), you will be able to set conservative targets for some and more ambitious targets for others within the same trade. It is a good way to start increasing your profits
- Move your stop to breakeven: If the price has moved in your favor, you should not allow yourself to lose anything on that trade. Place the stop at the entry point and prevent a virtually winning trade from becoming a loser
- Use a Trailing Stop: One way to get larger profits is to let the price advance without a take profit order and chase it with a stop that is moving in your favor a few pips behind.
Time Based Departures
Market conditions change as time goes by. What seemed like a strong trend in one direction can weaken and turn sideways or start moving in the opposite direction.
Therefore, it is recommended that you keep an eye on the time that has passed since you opened your positions.
If they take too long to reach the objective, it is possible that the premise that marked your entry is no longer valid and it is more convenient to close them.
A very clear example is the strategies of breaks or breakouts. In these situations, once the corresponding resistance or support is crossed, the price usually shoots up and moves rapidly vertically. If instead the pair sluggishly sideways or pulls back into the previous range, it is unlikely that it will hit the target the way you envisioned.
To determine what is considered an excessive timeframe, you must backtest your strategy. Analyze how long it takes on average for the price to reach its destination in winning and losing trades. Then, use this data as an exit condition for time in your operations.
If the price does not reach the take profit or stop loss within that period, close the trade.
Timed exits are especially interesting if you are day trading, because you will have to close your positions before the end of the day.
Importance of Keeping Time in Mind When Looking for the Best Benefit/Risk Ratio for Your Exits
When determining which b/r ratio is most suitable for your strategies, it is also convenient that you take into account the time it takes to complete each of them.
The longer your trades are open, the more exposed you are to changing market conditions or unforeseen news-related movements.
Therefore, when backtesting, you should give preference to solutions that are completed quickly over those that take more time. Again, the speed depends on the type of trading you do. If you day trade forex, a b/r ratio that takes an average of 4 hours to reach the target is too slow. A trade that is executed at 9 pm will not have enough time to develop before the rollover time arrives.
Summary of Strategies for Exiting a Trade
Remember that the exit of your operations is more important than the entrances, because it is in them when your profits or your losses materialize. An excellent entrance with a bad exit does not earn you anything, while a modest entrance with a good exit does.
Either way, don’t get hung up on finding the perfect outlet. There is always some money left on the table or a part of the winnings is returned. The really important thing is that you consistently execute what your strategy tells you, without paying attention to anything else. This is what will determine if you manage to be a winner in the long term or not.
To improve your exits you can incorporate partial closures to your operations, move the stop loss to breakeven when the price has moved in your favor or use a trailing stop. Whatever system you use for your stop loss, be disciplined and do not remove it in case the price moves against you. Remember that it is important to place it in a coherent area from a technical point of view.
Some of the closing strategies that you can start putting into practice from today are the use of supports and resistances to locate your exits, the crossing of the price with a moving average or the analysis of volatility.
Frequent questions
When to Exit a Trading Operation?
You can exit a trade when the price approaches relevant support or resistance, when it crosses a counter-trend moving average, or when volume or volatility weakens.
When to Take Profits in Trading?
To close your winning trades, you can wait for the price to reach the target you have set or for an indicator to show you that the current movement is losing strength and could sideways or turn around.
When to Close a Forex Trade?
In forex, trades are closed when the price has reached the intended target, or if it has reached the security stop loss. To determine it, you can use the nearest support and resistance, a moving average or an indicator that marks a decrease in volatility.
How Much Should I Risk in Forex?
It is convenient that you never risk more than 1 or 2% of your capital in each of your forex operations. If you do scalping it is recommended that you reduce this percentage to 0.5%.
How not to Fail in Trading?
In trading you work with probabilities and some trades always fail. The important thing is to win more when you succeed than you lose when you miss, in global calculation. If losing mentally affects you, you can look for strategies that have a very high hit ratio, with a low b/r ratio.
How Much Money Do You Need to Live From Trading?
This question is very subjective and you need to specify how much money you need each month. A trader who wants to earn 2,000 euros a month and who is capable of achieving a 10% annual return with his operations, would need a capital of 240,000 euros.
How to Become a Good Trader?
The first step to becoming a good trader is to be consistent with the way you execute your trade. This means doing exactly what your trading plan dictates without going out of it.