When To Enter Or Exit A Forex Trade | A Step-By-Step-Guide for 2019
Entering and exiting positions in Forex are essential elements to your trading, ones that can make the difference between a successful or failing trade. Our beginner’s guide to entering and exiting a Forex trade will provide you with all the information you will need to know about entry and exit points.
Throughout this expert guide, our professional team of traders will walk you through the basic steps of entering and exiting a trade via an FX broker. We’ll also discuss trade timing when it comes to opening or closing a position in the market, since knowing when to do so is crucial for your success as a trader. We’ll also outline the factors you will need to consider when developing your entry and exit strategies.
Keep reading to find out the necessary steps needed to confidently execute your first FX trade.
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How to Enter a Forex Trade
An entry point refers to the exact price at which a Forex trader opens a buy or sell position. Metaphorically speaking, it is when you open fire and go into the market. Proper entry points are defined after thorough market research and are typically part of a planned trading strategy for reducing investment risk. They can maximize your profits in each trade, which is why professional traders take them very seriously and follow strict rules to find the best entries for their positions.
Let’s start by discussing the steps needed on selecting precise entry points:
Step 1: Analyze the market and identify a trend: Research, learn and understand what are the relevant correlations and factors that are affecting the market. When trading forex pairs, the first step is to understand what moves the various currencies. After learning about the forces pressuring a forex pair, you will know what to do with a specific asset.
Forces include interest rate changes that can push a currency price up or down, geopolitical factors like war, political unease or over supply/under supply of a commodity like oil. Too much inventory also decreases prices, as well as natural disasters and natural supply and demand.
Step 2: Pick your position: After analyzing the market and perhaps focusing solely on understanding just one asset, you should then decide whether to buy or sell the pair. In other words, you will go long if you buy the unit, or you will go short if you choose to sell the asset.
In Forex, you will obtain profits by the difference between the entry and exit prices; that’s why picking the right entry point is vital for your position. The key point in this step is to BUY LOW, SELL HIGH and vice versa. For instance, if you think the price of the EUR/USD is low, buy it and then sell it later for profit. Or the reverse is true if you think the price is high, sell it and then buy it back for a lower price.
Step 3: Use proper position sizes: Position sizing pertains to the size of the position you’re trading, which is measured in lots. Most brokers offer a standard lot, which is $100,000. Some also offer mini lots at $10,000, and micro lot at $1,000.
Risk management is one of the most important things to consider when you are ready to enter the market. Using proper position sizes will allow you to maintain yourself no matter what the outcome is. You will also trade at the right amount of risk — not too much, nor too little.
As one of the basic rules in Forex trading is never risking more than the 3% of your portfolio in a single trade, your position shouldn’t exceed that. Remember that the market will be there tomorrow, so make sure your account will be too.
Step 4: Use limit orders: Limit orders are orders to purchase or sell a pair at a specific price or a better, and they can be requested via a broker as most platforms have them built-in. For instance, a take-profit set up will allow you to get your profit from a trade at a pre-defined level, e.g., 10% profit. A stop-loss order will close your position out if you are losing a trade when a specific price is triggered.
When you are placing limit orders, the basic rule says that a buy-limit order will be only executed at the chosen price or lower, while a sell-limit order will be activated at the limit price or higher. Bear in mind that limit orders are not guaranteed to execute, as they must respond to precise specifications.
Step 5: Use indicators: Technical indicators are preset statistical studies that provide you with crucial information about the market and Forex pairs. It will help you to set entry and exit points, understand supply and demand, and possible swings, among other data.
You can create trading signals for yourself using one or more indicators. This will define exactly when to enter or exit a trade. If you want to really step up your game it’s worth learning about the key indicators, these include Moving Average, Bollinger Bands and MACD among others.
Step 6: Monitor your trade: Finally, watch out for your position and monitor your trade periodically as market conditions can change due to technical factors or economic news. Monitoring your business will allow you to cut your losses if the market goes against you or maximize your profits if better circumstances evolve with your trading position.
Remember that no two positions are alike, so you can never entirely predict an outcome. Entry and exit point preferences will also vary depending on the trader and his/her strategy and style. So the best option is to find a trading strategy that fits with you and then choose entry and exit triggers that are in line with your plan.
How to Exit a Forex Trade
An exit point refers to the price at which you want to close your position and go out of the market or trade.
We should understand that there are only two ways to get out of a trade: Through loss or gain. Although it might seem obvious, the way you include both profit-taking and stop-loss in your strategy will determine the fate of your trade.
Let’s look at both options:
Exiting a forex trade via take-profit orders: A take-profit order, also known as T/P, is a limit order that specifies the exact price, or the specific profit level at which you want your broker to close your position. Usually, take-profit orders are used by short-term traders that are interested in taking advantage of precise volatile conditions in pairs.
T/P orders are placed after identifying the price target, which can be found using technical analysis. As a trader, you can add take-profit orders with most brokers, but there are some outliers that don’t offer that option. In any case, it’s always a good idea to compare the best brokers and see what tools they offer new clients.
Profit-taking orders are always set above the current asking price when you are buying a pair, or below the bid price when you are selling a cross. It could be fixed by a percentage of the position value, a number of pips, or an exact price.
Exiting a forex trade via stop-loss orders: A stop-loss order is a kind of command which instructs your broker to close your position when the unit touches a specific price or when an amount of losses is reached. Stop-losses are always above current asking price on a buy, or beneath current bid price on a sell.
There are three types of stop-loss orders: Good ‘til canceled (GTC), Day Order, and Trailing Stop. GTC is an order to buy or sell a stock or security at a fixed price that remains active until the trade is completed or until the trader cancels it. A Day Order is a request that expires at the end of the trading day.
Trailing stop orders set the trigger price at a fixed amount of pips or a defined percentage below the market price. A Trailing stop is dynamic as it changes if the position moves in favor of the trader but remains static when the market comes against the position.
Although stop-loss is the kind of order you never want to execute, you should include it along with profit-taking in your strategies. It helps lock in profits while limiting potential losses.
Developing an Entry and Exit Strategy
There are several factors you’d need to consider when developing an entry and exit strategy. Our trading team are going to uncover some of the most important questions you’d need to ask yourself when it comes to your strategy.
How long do you plan to be in this trade?
In the Forex market, it matters if you are a long-term trader or a day trader. The time spectrum of your trade will determine many things, including the risk inherent to your position, how you should monitor your trade and even potential gains and losses.
When you are trading long-term positions, your take-profit and stop-loss orders will be wider regarding the spot price. The reason is that your trade will have to assimilate short term noise, fundamental news, and technical events. You should be more patient, but your gains will be more significant.
On the other hand, short-term traders should be stricter when identifying entry and exit points. If you want to trade short term positions, it will help if you use technical indicators to identify entry points and to set exit orders. You are going to buy and sell more as a short-term trader, so you should be very strict with risk money management.
How much risk are you willing to take?
Here at TopRatedForexBrokers, we are committed to the well-being of traders, so for this reason we would like to reemphasize the importance of risk management. When you are measuring your risk, you should analyze and identify the level of acceptable losses you may have prior to trading.
While risk is good for investments as it is the lifeblood of profits, you should avoid risking too much money in a single position. In other words, you should have a good risk/reward ratio. It is not ideal to have a risk/reward ratio of less than 1/3, which means that your potential gain is three times your possible losses.
Short term traders usually prefer a lower risk ratio as they make money on the volume of winning trades; while long term investors have a higher risk/reward ratio as they maximize each position they open.
The Art of Entry and Exit Points in Forex
Entry and exit points are essential in your trading strategy, as they can maximize your profits, while limiting your losses. Any professional trader should take it into account and include both levels in their analysis. Remember, stronger opening and closing points will produce more solid profits and risk/reward ratios.
You can practice entering and exiting a trade through demo accounts offered by our recommended forex brokers. This way, you’ll develop and refine a trading strategy that will help you establish long-term success in your forex career.
Frequently asked questions
What is a pending order?
A pending order is an instruction made by a trader to a broker where he asks the platform to execute a trade only when specific conditions are met. By definition, a pending order is an order that is not yet implemented. Types of pending orders are Buy Limit, Buy Stop, Sell Limit, and Sell Stop.
What is a short entry in forex?
A short entry in forex means that you are selling a forex pair that you believe will eventually fall in value, and then you will buy it cheaper. In forex, traders that believe the price of a pair will go down are called bears. If you are a bear, you will make money with the decline difference between both opening and closing prices.
What is a long entry in forex?
A long entry in forex is when you buy a pair as you believe that the price will increase and you are going to sell it for a higher value later. In the investment market, traders who believe the price of an instrument will go higher are called bulls. If you are a bull, you will make money with the difference between the opening and closing prices since you buy cheaper and sell higher.
How is pip stop loss calculated?
Your risk/reward ratio should answer to that calculation. Overall, you will take your pips at risk and multiply for your risk/reward ratio. In the case your P/R is 1-to-3, For each pip of potential gain, you should have a 0.3 pip for possible loss. Also, be aware of support and resistance levels. Place your stop losses above resistance and below support levels.
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Recommended further readings
- Mathematical Foundations of Realtime Equity Trading. Malyshkin, V. G., & Bakhramov, R. (2015). Liquidity Deficit and Market Dynamics. Automated Trading Machines. Liquidity Deficit and Market Dynamics. Automated Trading Machines.(September 13, 2015).
- “Exchange rate effects on the volume and variability of trade flows.” Barkoulas, John T., Christopher F. Baum, and Mustafa Caglayan. Journal of International Money and Finance 21, no. 4 (2002): 481-496.