Trading exit strategies: How and when to exit a trade
Imagine being so in control of your exit strategies that you could come out of a losing trade without feeling any emotion and simply move on, unaffected, towards hitting your next targets and locking in profits.
For many traders, this might seem impossible, but it’s no fairy tale.
Being able to control your exits – and, by default, your emotions – is a higher-level character trait of all successful traders. If you’re going to be in this game long term and wield your edge (which, of course, successful traders must do), you’re going to have to learn to nail your profit-taking strategies.
The two biggest complaints we hear time and time again among new traders on how to exit trades are:
- Knowing when to take profits is hard
- Exiting a position at a loss by following your stop-loss is painful – especially when previous trades you exited turned around and became profitable
On the first point, one of the toughest profit exits you can make comes straight after a series of losing trades.
Imagine a scenario where you closed five consecutive losing trades — not big losses, but losses nonetheless. Then imagine one of those trades moved into profit early on before reversing and getting stopped out at a loss. So frustrating!
But then the sixth trade starts moving in your favour. If you are human – and given your previous five trades – odds are you’ll be keen to lock in a profit at the earliest sign of weakness. After all, profit is profit, right?
No.
If you’re going to realise the positive expectancy of your trading system, you need to trade the system, which includes your exits, as per your system rules. You can’t just jump in when you feel like it and lock in a profit because Murphy’s law will rise out of the ether and, no sooner will you have closed your small win, price action will continue strongly in your direction – without you on it.
But don’t despair because it’s human nature to want to do this. It’s also why learning correct trading exit strategies is so important. And, even more to the point, arming your trading toolkit with a range of complex exit strategies is key to your longevity and becoming a successful trader.
Before we get started with some of the common exit trading strategies, let's discuss why this concept is so important to maintaining a consistent trading plan.
Why do you need an exit strategy in trading?
An exit strategy is essential to building a successful trading system that works for you, whether it's for trading forex, indices, or cryptocurrency. There are a lot of exits available to traders, some simple and some complex. The complexity comes with the variety of exits that are required so that you can trade what's in front of you and achieve your objectives.
You need an exit trading strategy in place to make sure that you stay on track with the trading plan you have created. If you don’t stick to your plan and start letting your emotions dictate your trading positions, it can have a negative effect on the goals you’re trying to achieve.
An exit strategy complements your complete trading strategy and ensures you practice proper risk management techniques and trade management skills while helping you become a more profitable trader.
How to exit a trade?
Follow the steps below to be able to exit an open position on your account:
- Log into your trading account and open the MT4 platform
- Navigate to the 'Trade' tab and open your existing position
- Exit the position by selecting 'Close Order' and confirm the closure by pressing 'Close'.
Best trading exit strategies to learn
Finding the best entry point can take many hours and traders can sometimes put too much focus into it and end up taking bad exits. We've put together a list of some of the most commonly used exit trading strategies to help traders come up with a fully crafted plan.
1. Trailing stop (price or indicator)
A trailing stop (surprise, surprise) trails the current market price. An entire book could be written on trailing stops, given how many there are. Suffice it to say, they can be based on a set price (say, 50 pips) behind the market or they can be based on a technical indicator, such as a moving average.
If you like moving averages, you can also try displaced moving averages. These days traders tend to lean more towards price action for exits, but there is still something to the displaced moving average – particularly for some trading styles.
The trailing stop is probably the most emotionally successful way for a trader to manage a profitable trade. That's because, in the same way, that a stop protects your initial positions at the risk parameters a trader is happy to accept, a trailing stop can convert those risk parameters into a real-time position protection as the market moves.
And, of course, a trailing stop is exactly what it says on the box. It’s a stop loss that trails the market, moving higher on a long position or lower on a short position as the market price of the asset being traded moves.
Let’s say you bought AUDUSD with an initial stop of 50 points and a trailing stop of 50 points. That would mean that as the price moves higher the stop will "trail" or move higher with it. For example, any AUDUSD longs with a trailing 50 points long during last week's rally to a high of 0.7712 would now have the stop at 0.7662. A fallback below that level would see the long AUDUSD trade exit.
Traders can also use other indicators as trailing stop-loss levels.
2. Rapid market trailing stop
The rapid market trailing stop is ideal in a runaway market. You could short the Eurodollar, and some news hits the market, and it spikes down in your favour for three consecutive periods. But as soon as the move halts, reversal traders and Bollinger band traders jump in and load up in the other direction. As fast as the Eurodollar falls, it reverses, potentially wiping out your open profits.
Sometimes the market defies gravity and launches into a rapid move, only to come crashing back down.
In this case, you need a plan that tightens your exit as the market moves rapidly in your favour.
If you are in a trade that takes off like this, you can adjust your trailing stop to avoid giving back your gains. Perhaps you go to a lower timeframe or are prepared to only give back one or two times your risk.
3. Support and resistance trailing stop
In the forex market, there’s always talk about big institutions controlling the price action. Many will tell you how they love to trade around key levels.
As is often the case, when key resistance levels are broken, the market can run away higher, and short sellers scramble to close their losing positions. In this case, the support and resistance trailing stop allow you to lock in your open profits using those key levels, knowing the pain level of all the wrong-sided traders.
Support and resistance are difficult prices for the market to move through. They also form a platform for a further extension of the price. With a support and resistance trailing stop, you logically trail your stop behind the market in order to protect profits.
4. Price action
As you spend more time trading, you’ll get a good feel for price action, price action reversals, and when a market is set up to explode higher or lower. Then it’s up to you to use your price action knowledge to lock in profits when you notice a price action pattern is emerging.
This exit strategy is based on price action. For example, you might see candlestick reversal patterns that indicate the trend is coming to an end.
5. Large daily move
One technical indicator that many professional traders love to use is the Average True Range (ATR). This gives you an idea of how much a market moves over a specific time period.
When one of your trades moves in your favour outside of this, you need to proactively manage the trade, so you don’t give back too much open profit.
Depending on your trading timeframe, if there’s a large daily move of, say, 300 pips, you could look to sell as the market has most likely overshot.
6. Time stop
System traders often test the strength of various entry techniques using a time stop. i.e. Exit after X number of bars from entry.
When it comes to live trading, many traders implement a time stop that closes their position if there has been consolidation in a tight range over X number of sessions.
You may exit after a specific period of time in a trade, or on Friday before the market closes for the weekend. Cross rates-savvy traders often monitor cross rates to get an indication of the direction of the currency pairs they are trading. If the price action on the cross rates is signaling weakness, then it might be time to exit your trade.
7. Gapping stop-loss strategy
When a market gaps up in your favour, an approach you might like to back-test is putting your exit at the midpoint of that session’s candle in preparation for the next session.
So, if it were a daily chart on the USD/JPY and the market broke higher and closed near the highs, put your exit at the midpoint of the breakout candle.
8. Break-even stop loss
As the name implies, you move your exit up to break even (your original entry price) once the position has moved in your favour. Some look at their initial risk (1R) and move their stop to break even once the position is 1R in profit.
So, if your initial risk is $500 (1R) and your position is now $500 (1R) in profit, you would move your stop to break even.
9. Profit target
A profit target is an order you place to close your position once it hits a certain target price. These are useful in sideways markets, but some experts believe they work well in trends too.
10. Profit objective
The profit objective is the goal for your trade. When you understand your system, you’ll know how much profit the trade is capable of making. You can then manage the trade in a way that seeks to maximise profits.
In essence, it’s about letting profits run or altering profit targets, based on current market conditions and what your analysis suggests is likely in the near future. However, make sure to identify your objectives before placing an order.
11. Fundamental exit
You can exit a position, based on market fundamentals and news. For example, you might close out of your short-term positions prior to a major news announcement or exit a position following negative news.
12. Risk/Reward stop
With a risk/reward stop, you adjust your stop loss to maintain a minimum risk/reward of 1:1 at all times. This powerful approach helps you to maintain your profits if your trade gets close to your profit target, but does not touch it, then reverses.
13. Account target
If you have a specific account-based goal, such as 25% for the month, then you may close all positions in your account once this target is achieved.
14. Scale-out
By scaling out, you exit portions of your position, based on different criteria. For example, you might take a small amount off when the market first makes some available, some more at a pre-planned target, and finally leave some on a trailing stop to capture the big wins.
What do you need to consider in your exit trading strategy?
There are a few things to consider before you choose your exit trading strategy, including:
- Risk-Reward ratio
- Bid/Ask spread
- Risk tolerance
- Trading style
Risk-reward ratio
What is your goal? How much do you want to make? How much are you willing to lose? What can you afford to risk on this trade? These types of questions will help determine what exit trading strategy might be best for each individual situation.
Bid/Ask spread
When exiting a position, traders often need liquidity from other market participants who have not yet exited their positions in order to settle their trades at an attractive price. The bid/ask spread helps us measure the amount of time it takes for these new participants with unclosed positions (the "bids") to fill our orders (the "asks").
Risk tolerance
If you have a high-risk tolerance, this means that you’re willing to take more risks and accept larger losses in order to potentially make higher profits. Here, you can use the stop-loss exit trading strategy with a wider stop-loss distance from your entry price point if needed. If you have a low-risk tolerance, it limits how much of an investment is at stake each time something may go wrong. This may help provide peace of mind for traders who don't like taking big risks.
The concept behind all exit trading strategies is about managing risk so that we know when it's necessary to cut our losses or lock in gains as quickly as possible because they're not achievable any longer (or they're just too risky).
Trading style
When choosing your exit strategy, it's important to consider what your trading style is.
Some traders like to minimise their risks and lock in their gains as soon as possible while others might have a higher tolerance for taking on bigger losses because getting out too early may mean missing out on even larger profits later. If you're conservative about your trades but want more control over timing them so that they happen at points where there's still time to make up some ground, then use the stop-loss exit trading mode with a wider distance from the entry price point, if needed.
Conclusion
By having a variety of exit systems in your toolbox, you can effectively manage your position based on what happens in the market after you enter. You can then closely watch the market and adapt to its movements in order to generate the best possible result for your trade.
As a trader you can only plan, then be present. Once you execute the trade you are simply experiencing, not creating. Your exit decision should be based on what the market is doing right now, rather than on a perfect recreation of a historical pattern that conforms to your back-tested indicators.
It’s not a difficult thing to do, especially if you enter simply and apply the right exit to the right scenario.
As always, we’d encourage you to get out of your trading plan or trading journal and integrate this lesson into your forex trading system for maximum effect. Pick one or two exits from the list you’d like to add today, then start practicing with them. Over time, you can come back for more.
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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.
