By: Terry Allen
Here are a number of concepts that you should consider when designing your exit strategy. First, you must always know where to place your initial protective stop. This action is essential to order to prevent you from suffering severe losses should the trade go against you early on. In addition, your stop size must be well calculated in order to minimize your potential loss yet provide your new trade room to breathe.
You also need to devise a method so that you can protect your profits by moving your stop. One such method would be to perform this action every time a target level has been achieved. Another defensive strategy would be to move your stop to breakeven as quickly as possible but still allow good chances for your trade to achieve sizeable profits. By designing a suitable method would also provide the maximum protection for your budget.
Many traders use exit conditions based on a selected time period. This technique is especially useful during the releases of important Fundamental data as these events can produce large increases in price volatility. For example, if you expect a certain response to an event to occur within one hour after its release, then you could timeout if it fails to happen. Even after you have become more familiar with the Forex market and its different trading patterns, you may still suffer strings of losses because it is such a dynamic environment.
When losses start to mount up, traders have a tendency to increase their number of active trades in an attempt to regain their budgets. However, this action is not recommended because usually it means that you have lost focus and should consider taking a break. There is always tomorrow and another batch of new trading opportunities waiting for you. A good guide is to stop trading if you experience three or more straight losses in a row.
One of the most important Forex concepts is Money Management which, if understood and deployed properly, can help you reduce losses and as well as lock in profits. Without stating the obvious, there are only two possible ways to exit a trade. Either you make a profit or you incur a loss. These two methods are called ‘take-profit’ and ‘stop-loss’ respectively.
Stop-losses or stops are orders that you place with your Forex Broker to exit your trade should the market price move against you. They are always set below the opening position of a long trade and above for a short one.
Take-profit exits are similar but are set at target levels at which the trade is closed should it be reached. In contrast, Take-profits are set above the opening position for a long trade and below for a short one.
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