Timing is everything in forex trading. Enter a position too late, and you might miss out on the price movement you were hoping to use to generate a profit from your trade.
The same is true when exiting a trade: If you exit too early, you might miss out on additional price action that would have fattened your profits. But if you hold on to a position too long, your profit margin could come crashing down as the price movement reverses and puts you at risk of taking a loss.
Experienced traders understand the importance of exiting as close to the peak of their potential profit as possible. Forex exit indicators can offer the foresight and information you need to identify the right exit opportunity and take a profit from your trading action. If you’re unfamiliar with these indicators, it’s worth educating yourself on your options so you can experiment with different strategies and identify the indicators that work best for you.
Here are some popular forex exit indicators to consider using in your own exit strategy.
A stop-limit is a basic exit strategy that helps you guard against losses when price movement goes opposite to your expectations. For beginning traders, it’s also a reliable tool because it takes the decision-making out of exiting a trade, protecting you from making impulsive decisions (or nondecisions) that could end up costing you money.
To use this exit strategy, traders should first identify lines of support and resistance within the price movement of a currency pair. A stop can then be placed below the line of support to define a clear exit if the price breaks below the support and continues a downward trend. Meanwhile, another stop can be placed at or near the line of resistance to automatically exit a position when the trade reaches a certain profit level.
Regardless of which direction the price moves, you’ll have a well-defined exit that takes the guesswork out of trading—and you’ll either secure a nice profit or suffer a small but manageable loss.
Moving Average Stop
The moving average is another simple exit indicator that beginners and experts can all use to guide trading decisions. The concept of a moving average stop is simple: When the price of a currency pair moves below the moving average, it indicates a sell situation and can be used to recommend an exit from an open position.
The moving average is an effective exit indicator because a price crossover indicates a significant shift in the trend of a currency pair. Similar to how the moving average is used as an exit indicator, it’s also used by traders to identify buying opportunities when the price of a pair moves above the moving average trend line.
For traders who want to simplify exits and guard against their own impulse to stick with an open position, it’s easy to set a stop-loss just below the moving average on a currency pair. If the price shifts and dips below this number, a trade can automatically be executed to minimize your losses.
Average True Range
Average true range (ATR) is an indicator that measures overall volatility to set stops and limits based on overall market behavior. In general, a larger ATR requires a wide range between the stop and the limit you set, because more market volatility is going to lead to erratic price movements.
If you set too narrow of a range, you could have your position closed too early, and possibly take a loss as a result. Similarly, too low of a limit could close your position prematurely and cost you valuable profits.
ATR can be used across any time frame, depending on how long you intend to hold a position. Set a stop-loss just higher than the full ATR, and set a limit for profit taking the same distance away from your entry point, which represents a realistic profit target given the pair’s volatility.
The relative strength index (RSI) is a useful tool for determining when currency pairs are overbought or oversold. This can be an effective tool for using the trading action on a currency pair to determine whether you should exit ahead of a significant price movement. If the RSI of a pair is overbought, for example, you may use this indicator to exit a position before the action on the pair dips, resulting in a price decline.
RSI is often used alongside other indicators, such as moving average price, to give traders even greater confidence in their decision to exit a position.
A scaling exit is a strategy used in conjunction with other indicators, with an important twist: As soon as the price of a trade moves into a profit zone, traders can set a stop limit at this profit line to ensure that they exit the trade with a return on their open position.
After setting a scaling exit, most traders will take a more aggressive approach to letting the price run, because their risk has been canceled out. A common approach is to target the 75 percent mark between your risk and reward targets, and to then close your position on part or all of your investment, depending on how aggressive you want to be in targeting additional earnings.
As the price climbs, you may also consider raising your stop-limit even higher to guarantee a higher floor for your profits. Combine this strategy with the moving average or other indicators to set scaling stop-limits that maximize your earnings from a given trade.
As you gain experience with forex trading, you’ll likely identify certain indicators that you can rely on more than others. Experiment with different methods and lean into the indicators that prove most reliable within your own trade evaluation strategy. In the end, the best forex exit indicators are the ones that help you time your trades to maximize your profits.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.