By: Terry Allen
One of the big differences between beginners and experts is that the former determines only how to enter trades without giving much consideration on how they plan to exit them. Experts, on the other hand, pay very careful attention to their exit strategies and always know how they intend to exit their trades even before they enter them.
Experts base their exit strategies on a number of concepts such as the following. They could exit after a chosen technical indicator has achieved a forecasted critical setting e.g. Stochastic crossover. They may target a price level which they think price action can readily reach from prior considerations of technical and fundamental factors. Some prefer to select a time period within which their targets must be achieved otherwise they will be exit these trades.
Many experts recommend that once you have entered a trade and have set your targets and stops then you should never change them. You should definitely not keep moving your stop otherwise you will expose yourself to increasing risk. Just waiting for a trade to turn is a very negative strategy that could place your entire budget at risk.
However, profit targets are a very different matter because, if they are taken prematurely, then you are, in fact, reducing your risk:reward ratio. This is definitely not a good strategy in the long term. A very sound Forex maxim is to ‘let your profits run‘. As such, if you can detect a trend that would allow you to do this, then you are well advised to stick with it even if this action means adjusting your trade limit after entry.
However, another important trading condition, that can arise, is when a trade, that you expect to move in a certain direction, does the opposite. In such circumstances, you should consider whether to reduce the size of your target or even move your stop towards the price value (never away) in an effort to reduce your risk exposure.
In addition, great care should be taken if you find yourself trading under the following conditions. Suppose you have set an entry short order because you are anticipating a price rebound from a resistance level. However, although a bounce back does occur, as expected, and enough to activate your short, the trade then resumes its long trend. Should this happen then you need to consider closing your trade down immediately and, as a result, minimize your losses.
To provide yourself with maximum protection, you need to become very experience at chart studying so that you can detect when these sort of patterns are beginning to materialize. You then need to know how best to respond to them in a manner that will secure you the best risk:reward ratio as possible.
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