How To Develop a Forex Entry & Exit Strategy
An entry and exit strategy can make or break a forex trader. This demands proper risk management, but also emotional discipline.
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- How To Enter a Trade
- How To Exit a Trade
- Deciding When To Enter and Exit
You’ve found the perfect trading platform, you’ve researched your preferred currency pairs, and you’ve deposited your precious capital. What’s next?
Now is the time when the real nail-biting begins. By clicking “buy” or “sell”, you submit your money to the mercy of the live markets. The only thing protecting you now is the soundness of your entry and exit strategy!
How To Enter a Trade
Obviously, the placement of your entry can make or break your trade. Those “buy” and “sell” buttons on your trading platform look very appealing, but you should never enter the markets without careful consideration and planning. In actual fact, there are various types of entry order:
Market Execution Order – This is an “immediate” entry, whereby entry is executed at the current market price. In highly volatile or illiquid markets, this can leave the trader prone to slippage, where the executed price ends up slightly higher or lower than expected. Slippage can also occur when technology delays your order execution, which is why choosing a cutting-edge trading broker is critical to your success.
Pending Orders – These are custom, preset levels that trigger entry. Sell Limits and Buy Stops are placed below the current price, whilst Buy Limits and Sell Stops are placed above the current price. This prevents you from having to monitor the charts constantly and place orders manually.
How To Exit a Trade
In the same way, there are multiple options for closing trades:
Market Execution Order – Trades are closed at the current market price.
Pending Orders – These are especially important for closing trades because they control your floating profit/loss. A Stop Loss order is a preset exit triggered by unfavourable price movement to prevent your losses spiraling. A Trailing Stop is similar but follows price movement by a predetermined number of pips. On the other hand, a Take Profit order is an exit effected when price moves in your favour, allowing you to close with a set profit.
Preset orders are very important for staying disciplined and consistent in your strategy. By thinking ahead to your exit, you can ensure you’re prepared whichever way the market moves.
Deciding When To Enter and Exit
Trading is all about timing. First, you need to make an educated prediction of future price movement in order to decide whether to go long or go short. The beauty of trading forex CFDs is that you speculate on price differences, so you can buy or sell without having to own the underlying asset. Often, fundamental analysis offers insights into significant news events that are likely to trigger a strong price movement in either direction.
Once you’ve decided whether to buy or sell, you need to pinpoint the best moment to enter the market. If you’re a swing trader or scalper looking for fast, short term, trades, precision is especially key. This is where technical indicators can help you filter through market noise and identify ideal entry points in the market.
In particular, engulfing candlestick patterns, support or resistance lines, and the RSI are very useful for finding price reversals. These allow traders to capitalize on recurring price patterns by placing their entry orders within specific zones. In the same way, indicators can also help you place protective stop losses in case price moves unexpectedly, for example by breaking through a support or resistance zone.
However, as always with technical indicators, your conclusions are only as good as your analysis. If you apply indicators imprecisely, you can’t expect to place optimal trade entries and exits!
Overall, planning your exit is just as important as planning your entry. Unfortunately, traders cannot simply wait for a price to move in their favour when they are trading on margin, so it’s important to plan for all eventualities. Furthermore, trades left open overnight can incur rollover fees from your platform, so remember to factor this into your exit plan.
For beginners, it’s advisable to place tight entry and exit orders so you know you’re in control at all times. Profits will come more gradually, but you’ll hopefully avoid suffering larger losses. Although stop losses and trailing stops offer some protection, this isn’t license to be reckless with your trades!
Even the most experienced traders will agonize over the timing of their trade orders and still make mistakes. Of course, if there existed a completely foolproof strategy, every trader would be a millionaire. However, you can put yourself on the side of probability, contain your risk, and secure your profits with an effective entry and exit strategy.