Contents
Key Takeaways🔑
| →Forex exit strategies are crucial in managing risk and preserving capital while trading. |
| →Three common forex exit strategies include setting a stop loss using support and resistance levels, setting a dynamic stop loss, and using the ATR to place a stop loss. |
| →Developing a solid trading plan, including exit strategies, helps maintain discipline and build trading confidence. |
What are forex exit strategies in trading?
Knowing when to enter the trade is very important but this is not the only thing the traders should focus on. Having good forex exit strategies also influences your trading performance. You have to finish the trade at the right time if you want to end up winning. So today, I will discuss three forex exit strategies that you can use while trading forex on the IQ Option platform.
3 forex exit strategies for IQ Option traders
The strategies you will read about in this article are the most commonly used by forex traders. Their purpose is to help you get out of the trade just at the right moment. Knowing when to exit a trade is something which should be adjusted and paired with the trading signals you are using. These forex exit strategies we recommend to try are:
- Setting a stop loss using support and resistance levels;
- Setting a dynamic stop loss;
- Using the ATR to place a stop loss.
Setting a stop loss using support and resistance levels
Setting a stop loss will help you in not such an easy task of controlling your emotions. Without a stop loss placed, you can feel fear and anxiety when the transaction begins to lose money. With a stop loss, you decide how much you are ready to risk beforehand and you will not lose more than that.
It is proved that establishing a risk-to-reward ratio of 1:1 at minimum is one of the contributions to being successful in trading.
So consider how much capital you have and how big loss you can take. Place a stop loss at this level. Place the target at a distance of at least as many pips. The transaction will be closed automatically when the price reaches either one of the preset levels.
It is quite common to use resistance and support levels to determine the stop loss and take profit. For long positions, a stop loss is usually set somewhat below the support while take profit is set around the resistance level. Support and resistance are the levels that the price approaches frequently and you can expect it will reach these levels again in the near future.
When maintaining short positions, a stop loss is normally placed slightly above the resistance level and take profit can be set around the nearest support. It is important to have a target at least equal to your stop loss.
Pros and Cons of Forex Exit Strategies
đź‘Ť Pros:
- Helps manage risk and protect trading capital
- Improves trading discipline and decision-making
- Allows for better control of emotions while trading
- Adaptable to different market conditions and timeframes
đź‘Ž Cons:
- Can require additional time and effort to learn and implement effectively
- May lead to early exits and missed profits if stop loss is set too tight
- Needs constant monitoring and adjustment for optimal performance
| Forex Exit Strategy | Description |
|---|---|
| Static Stop Loss | Setting a stop loss based on support and resistance levels, predetermined risk tolerance, or other fixed criteria. |
| Dynamic Stop Loss | Using a moving average or other trend-following indicator to adjust the stop loss as the market moves in the desired direction. |
| ATR-based Stop Loss | Setting a stop loss based on the Average True Range indicator, which measures market volatility and adjusts the stop loss accordingly. |
Setting a dynamic stop loss
A moving average is customarily used to determine the direction of the trend on the price chart. It is said there is an uptrend whenever the price bars develop above the moving average. When the price runs below the moving average, there is a downtrend in the prices. This information tells the traders whether they should look for opportunities to buy or sell.
There is another piece of information you can get from the moving average. When it crosses the price bar, a change in the trend direction is very likely to happen. That is when the traders would like to close their transactions. So when you place a dynamic stop loss based on the simple moving average your position will be closed on time.
In the exemplary chart above, there was a long position opened when the price broke through the resistance. The stop loss was set at the simple moving average level. The price bars continue to develop above the moving average meaning there is an uptrend. A trader should move the stop loss accordingly.
Using the ATR to place a stop loss
The ATR stands for the Average True Range and is an indicator that measures the volatility of the market. It takes the average range between the low and the high for the last 14 candlesticks and you can use information about the random market movements to place stop loss and take profit.
To add the ATR to your IQ Option chart click on the Chart analysis icon and find a group of volatility indicators. The Average True Range will be among them in the list that will appear on the right side. Click on it and it will be added to your chart.
When the value of the ATR is bigger, the volatility is higher. The stop loss should be set wide. Otherwise, it could close the position too early. When the ATR shows lower volatility, the stop loss will be automatically smaller and connected to current market conditions.
You should set a stop loss just above 100% of the ATR. The take profit should be placed at a minimum equal distance from the point of the trade entry. You can use the ATR to help you determine the stop loss level at any time frame. ATR is used in this form, but can also be further mathematically transformed for other more complex forex exit strategies.
Conclusion
Your success in trading not only lies in finding the best points to enter the transaction. Knowing when it is best to close the trading position is no less important.
Setting a stop loss protects your capital against excessive losses. I have described 3 forex exit strategies for trading on the IQ Option platform. You can simply use the resistance and support lines to determine where to place a stop loss, place a dynamic stop loss with the moving average or use an extra indicator called the Average True Range.
Include forex exit strategies in your trading plan. This will help you to maintain discipline and to build trading confidence.
Try different strategies on the IQ Option demo account. You can practice in the risk-free environment and decide which strategy works best for you. Tell us how you deal with closing the trading position at the right time. Share your forex exit strategies with us in the comments below the article.
Best of luck!Â
Q&A: Forex Exit Strategies
- Q: What is the importance of having a forex exit strategy?
- A: A forex exit strategy helps manage risk, protect capital, maintain trading discipline, and improve decision-making while trading.
- Q: Can I use multiple exit strategies in my trading?
- A: Yes, combining different exit strategies can help optimize your trading performance and adapt to various market conditions.
- Q: How do I choose the best forex exit strategy for my trading style?
- A: Consider factors such as your risk tolerance, trading time frame, preferred indicators, and market conditions when selecting an exit strategy that suits your needs.
- Q: How do I set the right stop loss level with an ATR-based stop loss?
- A: Set the stop loss just above 100% of the ATR value to account for market volatility and avoid closing positions prematurely.
- Q: How often should I adjust my dynamic stop loss?
- A: The frequency of adjustment depends on market conditions and your trading strategy. Monitor and adjust your dynamic stop loss as needed to maximize profits and minimize losses.