Biggest Forex Beginner Mistakes - No Exit Strategy
Many of the best forex trading tips have little to do with following a specific trading strategy. They are common sense approaches that are often neglected by forex beginners, possibly because they were tempted by self-appointed forex experts to follow this or that 'great forex money making strategy'.
It's a bit like popping pills and/or following complex diets invented by self-appointed diet experts in order to lose weight. As simple as it might sound, you only need to do two things if you want to lose weight: 1) eat less 2) exercise more. Of course it can be quite a challenge to lose 20 pounds simply by eating less and exercising more, but that's another story. The point is that everyone knows what's best, the problem lies in doing what's best.
The internet is chocablock with can't-lose-make-a-million-today! forex strategies that absolutely, super-duper guarantee the pips will come rolling in if you follow the advice to the letter. But most of these strategies are about when to enter the market, not about when to get out. And it's the getting out that's the most important.
One of the most important rules to follow when trading the forex is to always have an exit strategy. Study after study shows that traders - whether in the stock market, futures market or forex - tend to sell winners to soon, and hold on to losers for too long. It makes sense, we are emotional beings and we know it.
A solid exit strategy can help you guard against this. Determine when you should go out of the market before you open the position, then lock in that exit when you enter the market. This exit might be a specific price goal or something like a trailing stop, as long as you set it up in advance.
Example I specific profit target and stop loss
Let's say you want to go short the USD/CAD after studying the fundamentals and the 1 day forex chart for the USD/CAD.
You decide you will get in if the USD/CAD reaches 1.0132. You will use the resistance around 1.0220 as your stop loss, meaning the trade will automatically be closed if the currency pair reaches that price.
From measuring the previous moves of the currency pair you gather that if the downtrend continues, the price will probably fall about 200 pips before retracement sets in again. So you set your profit target at 0.9940.
Example II trailing stop
Same situation, but instead of a fixed stop loss and profit target, you decide to use a trailing stop. This is a stop that - in case of a short position, like here - is set at a percentage level above market price. The trailing stop price is adjusted as the price fluctuates. It allows you to let the trade remain open when it goes your way - because there is no fixed profit target - while still cutting your losses at the same time.
It's really not that hard to formulate an exit strategy every time you open a position. It is simply a matter of answering the question 'when do I think the trade should be closed' before you actually open the trade. Because as soon as the trade is opened, real-time losses or winnings might (and often will) cloud your judgement.
If you're a forex beginner, now is the time to ram home the habits that almost all successful forex traders use. And one of the most important habits is having an exit strategy for every forex position you open.
You can find more about forex exit strategies in the book Forex for Ambitious Beginners.