Forex: Exiting Positions at a Right Time
The presented article covers one of the most important (in the author's opinion) aspects of trading in general and Forex trading in particular — management of orders and positions. This includes choosing entry points, making decisions about exit points, stop-loss and take-profit of a trade. I hope this article will help new traders, who just began to work with Forex, and also to experienced traders who work in the market regularly.
After I had started to trade Forex and had made my first big losses and profits I began to notice a very important thing about the whole trading process. While the right time to enter a position was rarely a problem for me (nearly 80% of all my open positions had gone into the "green" profit zone), the problem was hidden in determining the right exit point for that position. Not only was it important to cut my risk of the potential loss with a stop-loss order, but also to limit my greed and to take the profit when I can take it and make it as high as possible. There are many known guidelines and ways to enter a right position at a right time — like major economic news releases, global world events, technical indicators combinations, etc. But while the entering into a position is optional and traders can decide to miss as many good or bad entry point moments as they wish, this is not true if we talk about exiting a position. Margin trading makes it impossible to wait too long with an open position. More than that, every open position in a certain way limits trader's ability to trade.
Choosing the good exit points for positions could have been an easy task if only the Forex market was not so chaotic and volatile. In my opinion (backed by my trading experience), exit orders for every position should be constantly adjusted as the time passes and as the new market data (technical and fundamental) appears.
Let's say you took a short position in EUR/USD at 1.2563. At the time you are taking this position, the support/resistance level is 1.2500/1.2620. You set your stop-loss order to 1.2625 and your take-profit order to 1.2505. So now, this position can be considered as an intraday position or a position for 2-3 days. This means that you must close it before its "term" is over. Otherwise it will become a very unpredictable trade because the market will differ greatly from what it had been at the time you have entered this position. After the position is opened and the initial exit orders are set, you need to follow the market events and technical indicators to adjust your exit orders. The most important rule is to tighten the loss/profit limit as the time goes by. Usually, if I take a medium-term position (2-4 days) I try to lower the stop and target order by 10-25 pips every day. I also monitor global events, trying to tighten my stop-losses when some very important news can hurt my trade. If the profit is already quite high, I try to move my stop-loss to or beyond the entry point, making it a sure-win trade. The main idea here is to find an equilibrium point between greed and caution. But as your position gets older, the profit should be more limited and losses cut. Also, trader should always remember that if the market began to act unexpectedly, they need to be even more cautious with exit orders, including the cases when the position is still in profit.
Each trader has their own trading strategy and habits. I hope this article will make you think about such an important aspect of trading as the exit orders and this will only improve your trading results.