Five Principles of Every Forex Exit Strategy

When Will You Exit a Trade?

Identifying exits falls under the trading system category in that the exits should be placed at meaningful places in the market that are determined by support and resistance. With that said, it is important to always determine the initial exit prior to entering the trade. And then it is required to exit the trade when the stop tells you to.

1. An initial stop loss order

The purpose of the initial stop is to get you out of the trade if the trade goes in the wrong direction near the beginning of the trade. In general, many systems have both an initial and trailing stops, but the trailing stop may not be known until certain conditions are met. An ideal initial stop should allow "room to breathe" as well, but not so large as to cause the trader to take on excessive risk.

Use a stop loss exit strategy that is based on market price activity, key support resistance levels or some fibonacci levels.

2. Break-even stops are another commonly used forex exit strategy.

Stop loss may be moved to entry price when market moves in your favour is one way to secure a winning trade before employing any trailing stop strategies. This method is commonly used and is popular because it reduces anxiety during trading.

3. Use trailing stops to lock in profit when the market moves in the traders' favor

There are many trailing stop strategies to choose from. A very basic forex exit strategy is two bar trailing stop. The high or low of the last two bar are levels a trader should shift their stop loss level to in order to lock in profits. This strategy is great for intraday trading or when a trader is anticipating that the market is moving into a consolidation phrase.

4. Do not move stops for emotional reasons.

This is a rule and I like to add a side note to this topic of forex exit strategies is because it is the number 1 rule that should be adhered to. Trading with a plan and sticking to the plan eliminate emotions. This rule is what makes exit strategies serve their purpose and forex traders can reap their benefits.

5. Employing a time stop

Most trading systems would exit a trade before a major economic event like Non Farm Payroll. A time stop is used to exit a trade before these news event to avoid market volatility. Risk of market volatility is reduced by using a time stop.

Whenever you enter into a Forex trade of any kind, the first thing you have to make sure is that you have your exit strategy planned out regardless of whether the trade ends up a winner or a loser. Knowing how to manage your trade and the right exit strategy are the most important aspects of trading the Forex market.