Effective trading exit strategies include:

• Traditional limit/stop (using support and resistance)

• Moving average trailing stops

• ATR-based volatility strategy

Finding the ideal moment to join a trade is a major area of concentration for traders. Although significant, the location that traders pick to close off transactions ultimately determines the trade’s success. This article focuses on three trading exit techniques that traders should consider when attempting to close a position.

EXIT STRATEGY #1 FOR FOREX: TRADITIONAL STOP/LIMIT (USING SUPPORT AND RESISTANCE)

Setting objectives (limits) and stops concurrently with the trade entry is one of the finest techniques to control emotions. This strategy is much superior to entering without a “stop loss” and wiping the sweat from your forehead as you watch lost transactions deplete the equity of your account.

Before entering the market, traders should assess the degree of risk they are prepared to take, establish a stop at that level, and set a goal at least that many pips away from the stop. Trades are automatically ended at a reasonable level of risk if traders are incorrect; if traders are accurate and the price reaches the goal, the transaction is also immediately canceled. Both outcomes provide traders a way out.

Solid USD/JPY support and resistance levels

Investors seeking to go long would watch for the price to retrace from a support level and distinct buy signals from indicators. Since the price has momentarily fallen below support, traders may want to set a stop just below that level. The price has repeatedly reached the level of resistance. Thus this is where the restriction may be set. This will be the opposite for short situations, and stops may be near resistance while limits are put towards support.

EXIT STRATEGY #2 FOR FOREX: MOVING AVERAGE TRAILING STOPS

A moving average has long been recognized as a valuable tool for determining how a currency pair trends. The fundamental concept is that traders search for buying chances when the price is above a moving average. When the price is below a moving average, they look for selling opportunities. However, using a moving average as a trailing stop might also be beneficial.

A MA crossing over price is seen to indicate a changing trend. When this change has taken place, trend traders should exit their positions. This is why using a moving average to establish your stop loss may be successful.

On the chart above, a long entry is seen above a breakthrough resistance and also above the 100-day SMA. To achieve a 1:2 risk to reward ratio, the stop is set at 220 points from the moving average, and the limit is 440 points away. The MA will climb along with the price. Thus the stop should be placed wherever the MA is. In the event of a severe price turn, this offers a safety net.

EXIT STRATEGY #3 FOR FOREX: VOLATILITY-BASED APPROACH USING (ATR)

The Average True Range is used in the final approach (ATR). The ATR measures market volatility. The average distance between the high and low for the previous 14 candles provides traders with information on how unpredictable the market is, which they may use to establish stops and limits for each trade.

The broader the stop, the higher the ATR for a particular pair. This makes sense since a tight stop on an unstable pair can result in an early stop. Furthermore, extensive stops for a pair with lower volatility increase risk beyond what is required.

The ATR indicator is flexible and may be used at any period, making it global. Set your limit at least the same distance from the entrance point, and your stop is slightly over 100% of ATR.

The bottom of the chart’s blue ATR indicator for Brent crude oil displays the peak average volatility, which peaked at 135.8 pip. As a result, in a 1:1 risk-to-reward setup, when a trader enters a short position, the stop and limit will be 135.8 pip distances from the entry. Stops placed around the ATR effectively serve as volatility stops.

The data clearly shows that, in this situation, a 1:1 risk-to-reward ratio would have prematurely terminated the deal. This stresses the importance of the risk-to-reward ratio since traders should aim for more pips while taking on the least risk possible, leading to a better risk-to-reward ratio.

SUMMARY OF FOREX EXIT STRATEGIES

• Remember that successful forex trading involves more than having solid entrances since where traders leave their positions ultimately determines whether a transaction succeeds or fails.

• By establishing a trading plan that includes a detailed exit strategy to close off transactions, new traders may increase their confidence in trading.

• A comprehensive forex strategy includes more than simply trading exit methods.