Limiting losses, letting profits run – this is the formula for success for traders who want to act successfully in the long term. The exit from a profitable position does not necessarily have to be planned when entering the market, as it is the other way round in the event of losses. Nevertheless, exit levels are often useful.
Useful exit levels naturally coincide with significant zones in the chart. They are long positions z. B. often in the area of strong resistance zones. The position is closed considering that a move beyond resistance is less likely than a correction or consolidation phase. If the resistance is overcome, a new position can be opened if necessary. Resistances can consist of previous highs as well as important Fibonacci levels.
Run profits with trailing stops
In practice, determining course targets is often much more difficult. The concept of the trailing stop is therefore becoming increasingly popular. This order type is now possible with almost all Forex brokers. In the case of a trailing stop, the stop loss level is automatically adjusted if the price moves in the “right” direction. As a result, profits that have already been achieved are continuously hedged without the position having to be closed.
In connection with many chart formations, recommendations for course projections are also circulating in the relevant literature. In shoulder-head-shoulder formations, the distance between the head and neck line after the breakthrough in the reverse direction of the trend is the price target. In the case of triangle formations, the base of the triangle is (usually) projected as a target from the breakout point. Quite the same with a trading range: its amount is added to the point of the breakout in the trend direction and thus results in the technical price target.
Exit strategies for newbies
Trailing stops are especially helpful for newbies. Experience shows that beginners often close profitable positions too early and thus leave promising market constellations unused. This often happens against the background of a mental account formation: losses from previous trades are to be “recovered” and the account balance is raised to an emotionally pleasant level.
In Forex trading, the financing costs must also be taken into account due to the generally very large financial leverage. If the market stagnates for an extended period of time, traders pay high interest rates when 90 to 99 percent of the position consists of debt. Therefore, the exit can make sense even in permanently stagnating markets. The problem naturally mainly affects position traders who have been invested in the market for a longer period of time.
Exit strategies are already included in many trading systems. Either a position is closed when explicit exit signals are generated or it is closed when the entry signals are no longer valid.