Forex Trade Exit Strategies
Very few traders use propper Trade Exit Strategies. The question that I get the most from my students is how to enter a trade the right way? Almost no one mentions anything about trade exits. It amazes me all the time. Even though the question about trade exit strategies never happens, I try every time to explain how important that is.
The funny thing is that after a while, all students rarely talk about entries anymore. All discussions are now about how to exit a trade properly. If you are new to trading, then be happy that you found this article. Trust me, I’ve been trading the markets for more than twelve years. What I am telling you in this article is very important for your trading career and your equity curve.
Different Types Of Trade Exit Strategies
In this article, I will cover some of the trade exit strategies that I teach in my trading course, and you get them for free now.
So what are these Trade Exit Strategies that I’ll cover today?
- Using structure swings as exit target
- Stop-loss trailing below/above structure swing high/low
- Exit targets using ADR high/low
- Trade exit using Fibonacci extension
- Exiting a trade using chart pattern measures
Show Mr. Market Some Respect
One of the most common mistakes a new trader makes is, coming to the market without a plan. The market can be your best friend and offer you tremendous opportunities. It can also be your worst enemy and takes everything you have. By coming prepared, you’ll surely be on the market’s friendslist. Somehow, it seems like the market respects those who are prepared and showing respect for it.
Planning a trade is not that hard nor complicated. When planning a trade, you have to answer a set of questions. These questions are the same each time, so writing them down and having them as a checklist is an excellent idea. Let’s list them down:
Trade plan checklist
- “Why?” Simply, why you are planning to trade an asset. What are the fundamentals behind your decision? Is it based on technical analysis only? If so, what are those reasons? Listing the “why” in the right way makes you have a logical reason and not based on emotions only.
- “Where To Enter?” What you need to define here is the level you willing to enter the trade. The area where you think is a fair value for a good entry. A technical trader will mostly use a structure level. Entry levels can differ, and it depends on the trade you looking to take. I wrote an outstanding article about How To Properly Enter A Trade, read it for more details about entries.
- “How?” So how to enter the trade? What’s the entry trigger used? Is it a limit/stop order? Or you’ll wait for some candle formations? Even here, try to be as specific as possible. That way, you’ll learn to be more disciplined as a trader.
- “Where to exit?” This is the question that got you here from the beginning. This whole article is about this question, that’s why I will cover it more in detail.
Trade Exit Using Structure
Using structure as a level to exit a trade, is probably the most common exit strategy used by traders. A structure level is a significant swing high/low on the chart. Those levels are also possible support and resistance areas on the chart.
Due to that support or resistance possibility, we can never be sure if the market will keep moving through them or not. That’s why traders use those levels as a take profit area to exit a trade. You must understand the market structure and know-how to read it. Otherwise, you may set some poor exit levels. For a more detailed explanation, you can watch this video on How To Read Market Structure Correctly. It’s a recording from one of my live sessions in the trading course that I teach.
So, let’s consider the chart below. We have a market that found support and reversed to the upside. The price did a strong surge breaking the previous high at point (A). The break to the upside is your reason to start looking to go long. So you decided to go long on the pullback or retest of the broken structure at (A). Your trigger on that pullback is the bullish engulfing candle. Now you have the entry reason. But before you hit that buy button, you have to do some planning. I know you are anxious, and your fingers are itching to hit the buy button. But please, don’t do it that way.
Always decide your exit levels before you enter the trade. First out is the take profit level. Looking left, you see the significant swing high at point (B). The price moved down sharply from that level. Just before that swing high, the price bounced in the same area, which acted support as well. Based on those pieces of evidence, we can call it a possible trouble area, support, and resistance flip zone.
That’s where you set your exit target. Since at this point, you don’t know if the price will push through that level. Great, so now you have the exit target in place. What about the stop-loss?
Right, that also needs to be in place ahead of entering the trade. In my trading course, I have a whole session just about stop-loss placement. We can’t cover all that here. So, for this example, we will use a simple strategy for that. Set the SL below the low of the bullish engulfing candle and give it some buffer of extra pips.
Now, if you have at least a 1:1 risk to reward, you are good to go and hit that buy button. Leave it there, do not go to a lower time frame, do not mess with the trade! You did a great job so far! You planed the trade and followed the plan, now let the market do the rest.
Partial Trade Exit/Profit Taking Strategy
This exit strategy is an excellent cure for the sick of leaving money on the table. I can see your eyes wide open now, thinking about all those great trades that went way beyond your primary objective. It sucks when that happens, and you say to yourself: “Next time, I’ll have a bigger target.” Next, trade shows up on the charts, and you do the same planning but with a bigger exit target. This time the market reaches that area of trouble and reverse at you. Now, you feel bad since you didn’t take your profit earlier. This keeps going on and on. The market does what it best at, making us confused.
That’s why the Partial Trade Exit Strategy is an exceptional solution for you. I will use the same market and TF as the chart above, to illustrate how the strategy will look like.
Take a look at the chart below. You do the same plan as above, same entry reason and level, and the same SL placement. The only thing that you’ll change is, you close half the position at the first significant structure level. After closing half the position, you move your SL to breakeven or slightly in profit a couple of pips above your entry. That way, you cover the spread if the market to turn on you and take you out.
You made some profit, and you feel good about it and less stressed about the trade. After all, you banked some cash, and the rest of the trade is risk-free now. The fear factor should decrease dramatically. There’s no fear of leaving money on the table and no fear of losing any money. At this point, you can use the Trailing Stop-Loss Strategies that I’ll cover below.
Trailing Stop-Loss Above/Below Structure
One of the best exit strategies for the trend follower is the Stop-Loss (SL) trailing since we can never be sure of how long a trend will last. For this strategy, there are at least a couple of ways to play it. You either go with no targets at all, or you do what we did in the previous example, which is taking profit on half the position. To keep things simple, we will continue looking at the same chart as above.
Let’s consider the chart below, it looks cluttered, but it had to be that way, so I can explain in step by step how to play it. You took a long trade at significant support, and the trigger candle was a bullish engulfing. You plan to take off half profit at the previous major swing high, the same way as explained above — your SL at this point below the low of the bullish engulfing candle (1). Again, when the price reaches the significant swing high to the left, you close half of the position and move the SL to breakeven (2). Now, you wait to see if the market will continue in the same direction (Bullish in this case). Your SL should be at the same level for now (2), even though the market broke higher above the significant swing high.
The first time you should move your SL higher is when the price breaks above the swing high at point (A). When that happens and the market break above point (A), you move your SL higher and set it below the swing low at (3). You keep doing the same each time the market makes a new swing high. When the price break above point (B), you move your SL higher and set it below the swing low at (4) and so on. Point (F) in this example was the last swing high, and since the price broke above (D), you move your SL to (7). This time, the price dropped below (7) and stopped the trade, and you got an excellent trade. For a bearish trade, do the opposite of what we did in this example.
Be aware of one crucial thing about this strategy. Looking at the chart now, the strategy may seem simple and easy, but the truth is, it’s much harder than what it looks like. You have to stand out all those corrections. Seeing your profit getting eaten by those pullbacks is not an easy thing to handle, especially for a new trader. You must work on your discipline and follow the rules like a robot.
Trade Exit Strategy Using Fibonacci Extension
This strategy comes in handy when there’s no clear structure looking left to use as a possible target level. Even with this strategy, we can have two or more exit areas. To use this strategy, you need to know how to use the Fibonacci Extension tool. You’ll find the Fibonacci Extension tool in any platform you are using. It’s a standard tool.
So, let’s check the chart below. The price reversed at a key resistance after being in a substantial bullish run, with very shallow corrections. You saw the break below the structure at the point (A). You want to join the bears on the move down. As a disciplined trader, you waited for the pullback (Nice, you got the idea) and entered short on the bearish engulfing candle as the trigger. Looking left to find a structure to use as an exit level, you observe that there are not many significant swings. That’s when the Fibonacci extension comes handy to use.
Pick the tool; click once on the highest high at (A). Drag the mouse down to the lowest low at swing (B). Click once, now, back to (A), and click once again to end the measuring. Now, you can see the Fibonacci extensions that you will use for targets. The most popular levels are 1,382, 1,618, and the 2,0 expansions. When I use this strategy, I mostly use 1,618 as my first exit level. As soon as the market break and close below/above 1,382, I move my SL to breakeven. When and if the market reaches 1,618, I close half of the position and use the trailing SL exit strategy above for the rest of the position.
Trade Exit Using ADR (Average Daily Range)
Exiting a trade using the ADR indicator is a strategy that would work perfectly for a daytrader. The ADR is a straightforward indicator that calculates the average market volatility in terms of pips range. The calculation is simple, as shown below. So let’s say we choose to have five days period as our average daily range, the calculation would look like this.
- D1 = 56 pips
- D2 = 35 pips
- D3 = 47 pips
- D4 = 61 pips
- D5 = 29 pips
ADR = 56 + 35 + 47 + 61 + 29 = 228
ADR = 228 / 5 = 45,6 (approx 46 pips)
The more periods you take into consideration, the more D you will add, to then divide them by the same amount of D (days) used. Luckily, you will not need to calculate them manually, since the indicator will do that for you. The MT4 trading platform does not have the ADR as a standard indicator. You should be able to find one within the MQL4 community. You can search and use the one that pleases you. Tradinview users, search the term “[SD] ADR” in the indicator section. In the example below, I am using MT4 ADR. I like the one I am using since it plots the ADR high/low on the chart.
Looking at the chart below, here you can see how the ADR high and low are plotted on the chart. In the upper left corner, you can read the ADR of the pair. 35 pips in this case (EURGBP), and that’s based on five days. Also, you can read that today, the pair have done 44,6 pips move from the low to the high of the day or vice-versa. Notice how the price halted and reversed when it reached the ADR high. Now, let me be clear here, I am NOT saying this is the case every time. But if the market has an average range each day, then that is an excellent piece of evidence that you can use for your benefit.
There are days that the market push through ADR high/low and keeps moving for a while without neither stopping or reversing. Those moves happen when there is a significant surprise for a news release on the pair. Usually, when a market moves far from ADR high/low, it corrects back to those levels, (rule of thumb and not to be used as a blueprint).
So let’s say you been watching this pair, everything looked good, and you took an intraday trade. The market broke previous high, and you not sure how far the market will move. In that case, you could use the ADR high as your minimum target for the day. You can close half of that position and trail your SL on the rest of it. This method will help you with the “leaving money on the table” issue. Why exit a trade that didn’t even reach its average daily range? Furthermore, by using this method, you’ll be less stressed when seeing the market correcting at the ADR high/low, cause now, you know it’s normal behavior that the market halt or correct those levels.
Exiting a trade using chart pattern measures
Chart patterns are the bread and butter for every technical trader, we love them, and we use them each day. Chart patterns are used by daytraders as well as swing traders or position traders. Those patterns work just fine on all time frames. The main difference is that a chart pattern on a higher time frame as daily or weekly, have a much stronger signal. To keep the article short, I’ll cover only the three most used chart patterns: Head And Shoulders Double Top/Bottom, and flags. So, let’s take a look at those chart patterns and how you can use them to plan trade exits based on them.
Head and Shoulders Trade Exit Strategy
So, you’ve done your research, reviewed the fundamentals and want to short a market. The levels are marked on your chart, the plan is ready and you’re waiting for bearish evidence to happen at your pre-planned level. The market reaches your level and prints a Head and Shoulders pattern. What next?
Well, we want to know how big is our profit target and our stop loss level. Compute the formation height by subtracting the value of the neckline from the highest high reached in the head, measured vertically. Subtract the result from the breakout price where prices pierce the neckline, or, if the neckline slopes downward, close below the right shoulder low. The result is the minimum target price to which prices descend. The chart below is a textbook example on how to measure the exit of the trade.
For more details, and how to place a Stop-Loss when trading the head and shoulder pattern read how to trade the Head and Shoulders pattern, and excellent article I wrote about the top.
Measuring Trade Exits Using The Double Top/Bottom Pattern
Exiting a trade based on the Double Top/Bottom is also pretty straight forward. All you need to do is compute the pattern height from the lowest low between the two tops to the highest peak. Subtract the result from the lowest low (The neckline). The result is the target price where you should exit your trade. For the Double bottom pattern, you do the opposite. Also, in this case, you could close half the trade, and use the trailing SL strategy above for the rest. In the chart below we have an example of how to measure targets on the double bottom pattern. As you may notice I measured the bottom to the left, which has a higher low than the right one, to be on the safe side.
If your entry is not close enough to the breakpoint of the neckline, you may need to skip the trade and wait for a pullback. Late entry may not give you a good R:R, so better to wait for a pullback to the neckline.
I hope that you got a better knowledge of how to plan a propper trade exit. As you saw in this article, trading is so much more than entries, and that exits are as important if not more than entries. Don’t forget to come to the market prepared, and having a plan for both entries and exits. More important is to follow that plan with a rock-solid discipline and with no hesitation.
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