Forex trade entry and exit is one of the key aspects to managing your trades. Trade entry and exit in forex determine the difference between a winning and losing trade.
In this guide on forex trade entry and exit, learn the basics of trade management using an online forex trading platform.
We also discuss the importance of timing your trades. This includes for both opening and closing a position in the market.
For many traders, trade entry and exit is a means to an end for the hard work that comes before it. A forex trader may think that after all the planning and analyzing the markets, a trade entry and exit is simple.
But this is where things can go wrong.
Forex trade entry and exit is a mix of logic and a bit of an art. It usually takes a lot of practice to learn how to enter and exit your forex trades.
If you are a beginner in forex trading and have made it this far, then learning how to enter and exit a trade is important.
To be successful in managing your trading positions, traders should be confident and have a well-rounded plan. Forex trade management requires traders to know at the optimal points of entry and exit in the market.
The only way to be successful in forex entry and exit is by following a trading plan. Therefore, traders with a plan are more likely to succeed and trade objectively.
On the other hand, traders who do not have a trading plan can let emotions step in and this can ruin their trades.
It is easy to lose money in forex, but difficult to make money!
Acknowledging this fact is the first step towards a more prudent forex trade management.
The importance of trade entry and exit in forex
The best way to understand the importance of trade entry and exit in forex is by citing a few examples.
Have you ever faced a scenario in trading where you thought that price would move in one direction? But the market turns against you. A premature trade entry results in a larger drawdown on your trading account. Or in the worst case, blow up your trading equity.
Your trade either gets stopped or you closeout your position manually at a loss. A few sessions later, price then starts to reverse and moves in the original direction as per your analysis.
This can be very annoying for traders.
Let’s take a look at some of the bad examples of how not to trade!
Example of an early forex trade entry
The first chart below illustrates the concept of using bad money management in a trade that you are almost right about.
In the above chart you can see how a trade entry without good risk management can lead to a larger drawdown on the position.
Following the breakdown of the previously identified support level, a trader would have initiated a short position.
After price drops a few pips, we then see a reversal and price quickly recoups the losses. Following this, we then see price moving closer to the stop loss level.
If a trader used good position management techniques here, this reverse movement in the price would not impact the trade.
On the other hand, if a trader entered this position with a larger lot size, the reversal would result in a huge drawdown on their trading account.
In the worst-case scenario, depending on how leveraged you are, this move could have resulted in a margin call.
The next example highlights the importance of forex trade entry and exit by means of using pending and market orders.
Example of incorrectly using market vs. pending orders for trade entry
In this second example above, you can see that we have a divergence on the price charts. After price makes a low, we see that the RSI indicator is plotting a higher low.
At this point, if you would have taken a long position at market, you would get stopped out because price immediately drops lower than the previous low.
On the other hand, things would be different if you placed a pending order at the recent high. In this scenario, the price drop will not make any impact. In fact, after this drop, price reverses and moves higher with a steady momentum.
The above two examples illustrate the importance for forex trade entry and exit. It is just as important as your trading plan.
Forex trade entry basics
The forex trade entry is when you initiate the trade. The trade entry can either be a long position or a short position in the market.
The forex trade entry is the level at which price you expect the forex markets to rise or fall. Initiating a long or short position in the forex market is not as easy as just clicking the buy and sell button.
There are quite a few aspects that forex traders should bear in mind before they enter a forex trade.
The most essential element to setting up the optimal forex trade entry is to understand what the market is doing. There needs to be a reason behind why you are placing a pending order or placing a market order.
Forex traders should avoid placing market orders as much as possible.
Traders typically use market orders when they do not follow a trading plan or get drawn into the price action itself. All it takes is a couple of strong movements in the market which is enough to convince you to trade in that direction.
However, as many forex traders witness fake outs are nothing new in the market.
In the above chart, we have an example of a strong bearish move in the market. Without a trading plan, forex traders could easily get drawn into placing a short position here.
But as you notice in the following sessions price promptly reverses direction to move in the opposite direction.
Placing a market order at this level would prove to be expensive as it would result in your stop loss being hit quite quickly. In fact, placing a pending order at the low will also be disastrous.
This is what happens when you do not trade with plan.
Forex trade exit basics
Exiting a forex trade can mean two things. On one hand, you exit a forex trade when your trade closes with a profit. On the other hand, you can also exit your forex trade when you stop loss is hit.
One may think that setting up the take profit and stop loss is enough when it comes to the trade management in forex. But there are multiple ways to do this. Choosing the take profit and stop loss levels set at the correct price points is important.
Many at times, traders witness how prices linger around the stop loss levels before reversing direction. Managing this requires a fine balance between risk management and your trading plan. You should ensure that your take profit and stop loss levels are set up correctly.
Your trade will need some breathing space before moving in your anticipated direction.
Unfortunately, traders do not pay much attention to their forex trade exit plan. Stops are too close or too wide. Take profit levels are too far away or too close.
Hence, when trades are stopped out forex traders often complain about stop hunting or blaming their forex brokers.
The reality is the fact that when traders do not pay too much attention to their stop loss and take profit levels, it is quite possible that this simple mistake can prove to be costly.
Example of incorrect trade exits
The below chart emphasizes the importance of trade exits in forex.
Below, is a bullish flag pattern. This is a technical chart set up that signal’s continuation to the uptrend.
Following the bullish flag pattern, a trader would enter at the high of the flag and set their stop loss to the recent low.
With a bullish flag pattern, traders use a measured move for setting their targets.
But as you can see from the above chart, this forex trade exit fails because price reverses after the breakout.
Interestingly, your stop loss is triggered. You end up losing this trade only to see the market reversing the direction.
It is moments like these that can really frustrate a trader to ends. After getting stopped out, the trader may either accept the loss or it can trigger emotional trading.
From here on, it becomes a gamble as the price may or may not move in the intended direction.
So how can traders avoid such traps in the market? Well, the answer is by using efficient forex trade entry and exit techniques.
Five tips to better manage your forex trade entry and exit
In the following section, we will outline 5 tips for forex beginners to understand the best way to manage their forex trade entry and exit.
These steps cover both aspects of trade entry trade management as well as trade exit.
Traders can utilize these steps to better manage the performance of their forex positions.
1. Identify the trends in the forex market
The first step to good forex trade position management is by starting out by analyzing the trends in the forex market. Trends, as we know can change depending on the time frame that one is looking at.
For example, you may see that the market is in an uptrend on the daily chart timeframe. But if you drill down to a one hour chart time frame, the trend may be different.
As a result, traders should pay attention not just to the chart timeframe on which they will be trading. Traders should also pay attention to the larger time frame trends.
Eventually, it is the longer term trend that plays an important role in shaping the trends on the smaller chart timeframes.
However, having said the above traders will often notice that any changes to the longer-term trends usually begin on the smaller chart timeframes.
Therefore, traders need to pay attention to this fact as well. Trend reversals first appear on the short-term charts and only then will this be reflected on the longer-term chart timeframes.
An easy way to avoid this is to plan your trading positions in the markets where there is a strong trend that is emerging. It is safe to creating the trend direction if it is new or in the middle of a trend.
Trying to trade the trend after a prolonged period could increase the risk of a trend correction or even a trend reversal.
2. Use the correct combination of indicators
The indicators that you use in your trading strategy is important when it comes to forex trade entry and exit.
Many times, forex traders end up using multiple indicators which are redundant. These additional indicators only clutter your price charts and can make the forex technical analysis to be quite cumbersome.
Depending on the type of trading strategy that a forex trader is using, they need to make sure that their trading system is using the most optimal number of indicators.
As an example, if you are trading with the trend, then make sure that your trading system does not include any more than five indicators in total. You should also make sure that each of these indicators in your trading system offers something unique from the market.
For a trend-following trading strategy, you should make use of a trend-following indicator or momentum or a volatility indicator and an oscillator.
Additionally, you may also make use of the trend strength indicator. But using too many indicators beyond this can prove to be detrimental to your trading goals.
3. Calculate pip value and lot size
Forex risk management is an important aspect when it comes to trading. Forex trading is leveraged. Hence there is a good chance that incorrect use of the lot size will lead to wrong placement of your take profit and stop loss levels.
Before you go ahead and place your forex entry and exit orders, you need to make sure that you are not taking on undue risk. Hence, traders should follow the one percent risk management rule.
The one percent risk management rule states that on any given trade, traders should not risk more than 1% of their entire trading capital.
By taking this into account, you can then investigate splitting up your positions or using just one position. Depending on the lot size that you trade, you may have the flexibility of using wider stop loss and appropriate take profit levels.
4. Preparing a trading plan
Your trading plan can be beneficial for you especially when the markets are moving. A trading plan acts as a blueprint for your trades. Hence, it helps you to navigate through the chaos in the markets.
A training plan should typically comprise of the following:
- Reason for going long or short
- What price level will you be entering your trade
- What price will you exit your trade
- What lot size will you be using
- Do you plan to split the positions or use just one trade?
Questions to the above will help you to better place your forex entry and exit points on the trade.
5. Pending or market orders?
Next comes the question of whether you should use pending orders or market orders.
As we mentioned earlier, market orders are not recommended!
A trader generally uses market orders when they have not done enough research or fall into the trap of the market momentum. These market movements can be fickle, and the direction can change in an instant.
Hence using pending orders is a better option.
Traders do not need to focus too much on whether their pending order is triggered or not. At the end of the trade, forex trade management requires you to be right rather than wrong.
And you can be right if your pending order did not trigger.
Managing your forex trade entry and exits better – In conclusion
In conclusion, forex trade entry and exit management is not as simple as it seems.
The only way to get better at this is by observing the markets and analyzing your previously closed trades. The behavior of the markets also plays an important role.
Hence, managing your forex trade entry and exit is not only about where or how you place your trades. You also need to learn about how the market behaves. Timing of the trade, new releases can all play a role on forex trade management.
The best way for traders to become more efficient in managing their forex trade entry and exits is by practice.