Knowing when to get out of a trade can often be more important than knowing when to open a position, when trying to make money Forex trading. Money Management is a subject that is often discussed, but the importance of exit strategies when it comes to making money trading Forex, is rarely mentioned. One of the strongest pieces of advice that can be offered to traders is to always know what your exit strategy is before ever executing a trade. In this way you can be assured that you have at least started the process of disciplined trading.
It seems somewhat counterproductive to think about getting out of trade before you have ever placed it or began to make any money. However, if you do not plan to exit then you will not ever receive your profits from a winning trade and losing trades may cost more than you can afford to lose. Setting up an your exit involves a couple of different items and the first one is protective stops.
Protective stops are price levels that you determine and put on automatic pilot in order to stop a trade when it begins to go against you. If a trading platform does not allow you to place protective stops then do not use it. Stops should be placed after determining what your risk for loss in a particular trade is and how it will affect your trading account. Most traders should never risk more than 2% of their account on any one trade. For example if you have a $5,000 account you could risk up to $100 per trade. If you are working with mini-lots and normal leverage this would mean a trade could move against you by 100 pips before you would be stopped out. However, good money management rules state that to risk $100 dollars you must be able to profit by $300, which leads us to our next item.
Take profit points are just that as well. These are predetermined points along the way that you will close a position that is in the money in order to realize some gain. If you open only one position many traders will tell you to let your profits run, but in many cases this can come back to haunt you as the market retraces its steps. To be a profitable trader you must develop a strategy that lets you win more often or win enough to cover your losses. Forex traders that only have 40% successful trades can be profitable as long at their successful trades are enough to cover their losses. The third item is a way of letting your profits run while protecting them with a trailing stop. As your position continues to move further into a profit you move your protective stop along with it in order to protect you from losses and preserve some profit in case of a market reversal.
In conclusion, Forex trading requires that you protect your account at every turn. You must know when you will exit and take your profit as well as when you will exit and lick your wounds. It also requires that you manage your money in a way that allows you to profit from the way that you trade.