Trading Exit Strategies

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Trading Exit Strategies

Profitability of FOREX trading systems depend more on exit timing than on entry timing, and here is why. Statistically, traders cannot predict price movements based on technical analysis with probability more than 60%, and that’s a fact. It theoretically means that even if you flip a coin in order to decide whether you are buying or selling a currency pair today, you should still be a profitable trader if you exit the market at a right time, every time. Don’t get me wrong, I am not suggesting you enter the market using a coin, coz if you want a system to be stable you need to have probability of winning trades slightly over 50%. I’m just trying to highlight the fact that your trading exit strategy actually matters more than the entry one. You probably noticed that often you either close your positions too early or too late and because of that you miss a significant chunk of profit. Now let’s talk about what you can do to maximize your profits and minimize losses. In theory, if you cut losses in half and double profits, any trading system will become a profitable system, even it it’s a loosing system, so pay a very close attention to the subject I am going to reveal here in this post.

Ok… Your system gives you a buy EURUSD signal… Don’t hesitate and immediately buy EURUSD pair. There is nothing you can improve at the entrance point. Now, important! You can cut your losses at least in half if you use hedging instead of fixed stop losses. To fix your losses, instead of setting a stop-loss order, set another order in the opposite direction at the stop loss target point (sell order for our example). If market starts to move against your open position, you will end up with 2 opens positions: one is BUY and the other is SELL.

Hedging is a very good trading exit strategy. It lets you fix losses when volatility is high and certainty is low, and exit the market later at the nearest inter-session or inter-trend flat with zero loss most of the time. Inter-session flats for EURUSD are 30 – 40 pips on average which corresponds to the average stop-loss size of a day strategy. Inter-trend flats are often even more 50 – 70 pips on average.

Now take profit… Setting take profit orders correctly may double your profits. You probably set take profit orders to your projected profit targets or do not set them at all. WRONG!!! If you set take profit order to your profit target, you will lose a big chunk of your profit if market moves well beyond it. If you do not use take profit orders at all, in many cases you will also lose part of your profit if market pulls back near your profit targets. So I suggest you use take profit orders but in a different way.

Instead of setting take profit order to your profit target, set it based on the average daily range of the currency pair you are trading (+120 pips for EURUSD currency pair). I even recommend you to use the same take profits for your hedging orders also. In many cases these big take profit orders will be executed before market starts to pull back. I tested it many years ago, and I use such big take profit orders every day with a great success. In at least 30% of the cases they trigger. If you see that the market flats out near your profit target, just close your position manually or set a trailing take profit order if you expect more.

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