Forex entry and exit strategy requires a confident and well-thought-out plan. It requires traders to know at what point would be best to enter the market and at what point would be best to exit.
Traders that follow a strict plan are more likely to be successful than those without one and especially more than those that trade on their emotions.
In reality, though, traders can feel very pressured to find the right points to enter and exit the market and it can have an impact on how they trade.
While you have your plan, it is very natural to think what if it doesn’t work out? What if I’m wrong? Then end up buying or selling or at the wrong moment and blasting your forex entry and exit strategy into smithereens.
Emotional detachment, therefore, is a vital key element in understanding of how to find these points in the first place.
The more you understand how to identify forex entry and exit points, the easier it will be to remove such anxiety from your trades.
However, we will quickly mention though that there is no one clear-cut forex entry and exit strategy that will work for every trader. There are just too many factors to consider.
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Forex entry and exit strategy basics
While there are many different ways to implement forex entry and exit strategies, there are some basic things every trader needs to take into consideration.
Time frame
In what time frame do you want to make a profit? The strategies you use should work with the time frame you want to work with.
Are you looking for a huge profit, which might take a lot of time or small quick profits?
If you consider yourself a day trader or scalper, long-term entry and exit strategies are not likely to appeal to you. The reverse is also true for long-term traders and short-term strategies.
Basically, it boils down to this: Are you a trader, an investor or something in between?
When you consider the timeframe, you also have to consider volatility. Some entry and exit strategies work well in highly active markets while other work well in ranging markets.
Work with trends
We cannot stress enough how important it is to understand trends when looking at any kind of forex entry and exit strategy.
As you likely know by now, in simple terms, trading forex seeks to buy at a low price and sell at a high price. But if you do not know when these moments are likely to occur, you cannot say you have a strategy.
By understanding how trends work, you can identify potential entry and exit points and build your strategy around them.
Knowledge of how the market repeats itself is invaluable to any trader and can help them manage their expectations in relation to current market conditions.
In order to properly utilise trends though, you will need analytical skills and the appropriate tools.
Simplicity always works best
Whatever forex entry and exit strategy you decide to use, keep it simple.
The easier it is to learn and repeat the better.
Avoid too many variables or chances for error. The more elements there are to your forex entry and exit strategy, the higher the chances are of something going wrong.
On top of that, with simpler strategies you can isolate ineffective elements. With more complicated strategies, it can be harder to identify what isn’t working.
Simple strategies are also less stressful to implement. By removing unnecessary stress, you will trade better as you will think more clearly about what you are doing and you will feel less pressured.
Entering the market takes time
You may watch the market for days before deciding what would be a good point to enter it.
Ideally, though, you should have performed some fundamental and technical analysis on the market. You should be closely following the news and forex economic calendar.
By strategizing your entry point, you can also reduce developing the dreaded analysis paralysis, which can plague many newbie traders.
A plan allows you to remove distractions and focus solely on what matters.
Entering the market also needs to take into account the whole trading journey you are about to start. Don’t enter if you don’t know where you’ll exit.
Signs to enter the market
Many traders rely on certain conditions to take place and use these to enter the market.
There are many different scenarios that present favourable opportunities to enter the market. Here are a couple of quick ones to remember:
- Double tops or double bottoms. When you see these emerge in the market is can be a sign that the current market trend is about to reverse.
- Moving average crossover. When the current market price dips below the moving average it can signal that it is a good time to buy.
- Market overlap. When two or more financial markets overlap, the market is always more active. There are two significant cases of this in the world of forex trading:
- London and Tokyo overlap. This takes place for one hour during the summer at 8 am till 9 am BST.
- London and New York market overlap. This takes place all year round for four hours between 1 pm till 5 pm BST.
- Support and resistance levels. If support and resistance levels can be clearly identified, traders can estimate with a good degree of probability the best potential moments to enter the market.
Many traders also rely on indicators as well to highlight moments such as the above to enter the forex market.
Signals services
One of the easiest ways to know when to enter and exit the market is by using a trading signals service. But like all things in forex trading, nothing is completely perfect and they cannot solely be relied on.
While trading signals can inform when to enter and exit a trade, you need to be sure that they are a service that you can trust.
There are many pros and cons associated with them.
For beginners, they can be particularly useful as they can help them learn how to analyse the market.
Limit orders
Limit orders are the opposite of stop-losses. Instead of closing your position when a certain price is reached, they open them.
They are a great way to start your forex entry and exit strategy offering you more control than simply waiting for what you think is the right moment.
Here’s an example of how to utilise limit orders:
You’re currently watching the USD/EUR and you can see an upward trend is emerging.
You want to get on this trend but you believe the price will likely dip down at some point before climbing back on the trend, allowing you to enter the market at a lower rate.
You place your limit order at the desired rate. Bearing in mind your target should be possible to achieve.
Now you wait until the order limit is reached and your position has been opened.
Of course, if a certain amount of time goes by and your limit order is not reached, it would be a good idea to cancel it.
If you don’t, it may get triggered in a very different market environment and result in a loss, particularly if the forex market starts steeply trending downwards the position has been opened.
Like stop-losses, limit orders are another way to protect yourself, but they’re not useful to every type of trader. Scalpers, for example, will see no use whatsoever in limit orders, neither will traders operating in highly volatile conditions.
Exit strategies are more important
Of course, entering the market at a good point can be very beneficial.
It’s a lot easier to make a profit when you enter the market at a point when the market is down and you are certain it will go back up again.
That said, it is the exit part of your strategy where you make your money and so in many senses, it is a lot more important to get right.
By exiting poorly, traders can completely waste the hours, days or months they spent before entering the market.
Before you even enter the market, you should have some idea of how you were going to exit. The tough part comes with sticking with that goal as the pressure builds.
Know what you’re risking
A great way to calculate at what point you should enter and exit the market is by understanding what you are risking.
Keep your risk/reward ratio low. Many of the most successful traders keep it as low as 1:1. This way you are not risking more than you are willing to earn.
Others will argue not to have a risk/reward ratio lower than 1:2. This way what you can earn is always twice as much as what you are risking.
To such traders, anything lower is not worth their time and is too risky and it is better to use their time looking for bigger fish.
Based on the risk/reward ratio you set yourself, you can work out when to enter and exit the market.
You can find out more about risk management here.
Stop-losses are a must
This goes for both entry and exit strategies!
It doesn’t matter if you are just about to enter the market or just about to exit the market, stop-losses should never be far from your mind. In fact, as soon as you enter your trade, you really should place a stop-loss, just in case.
There are many ways you can implement them.
One effective way is setting them at a point past support levels. This way, you will likely exit the market where most other traders are.
If more favourable conditions appear since entering the market, and your current stop-loss is no longer necessary, adjust it to a higher point to improve your chances of making a profit. Ideally, it should be placed at a point where you will break even.
A better way to do this is with a trailing stop order. This kind of order is a stop-loss that adjusts itself as the price rises but doesn’t change if the market price goes down.
Another great way to use stop-losses is when your currency pair has exceeded your reward and you have a chance of making greater gains.
You simply wait until the price passes it and then set a stop-loss order at that rate. This is usually referred to as a protective stop. This way even in the worst case scenario you still reach your ideal exit point.
Being creative with stop-loss orders can really pay off.
Testing your entry and exit strategy
When you finally think you have a potential entry and exit strategy you need to find an appropriate environment to test it out.
What to look for
You, of course, also need to be able to measure the success of your entry and exit strategy as well.
- Is it easy to perform?
- How often can you do it in one day?
- Are you comfortable with the level of stress?
- How often are you successful? And how often are you not?
- Does the strategy work in certain market situations better than others?
When you start testing out your forex entry and exit strategy, you should record every trade you make using a trading journal.
Plan out numerous variations of your strategy. In most cases, entry and exit strategies evolve over time as traders perfect them. The strategy you started out with may be completely different to the strategy you end up with.
Remember to note the different market conditions under which you applied your strategy as well.
Where to test your strategy
While many may advise to use a demo account to practice implementing a strategy, we advise against this.
This is because a demo account does not show you real market conditions. In most cases, demo accounts automatically put orders directly through to the market and it doesn’t account for slippage like a real trading account.
Many traders who test their forex entry and exit strategy on a demo account end up disappointed when they realise that in real conditions it doesn’t work and end up losing money because of it.
Demo accounts also give you more capital to play around with than you actually have. What use is it to test your entry and exit strategy with a $1 million, when in reality you only have $1,000?
This has a knock on effect on your approach to risk too. The money you are risking is not real and you don’t feel the pressure that comes with real trading.
As we mentioned before, the pressure associated with entering and exiting the market is a very important factor for many beginners and testing your strategy without it can’t really be considered a true test.
Instead, we propose testing your strategy in a real environment, but with very small amounts of capital. Stick to figures around $10 or lower for a start and see how well the strategy performs.
Plus, until you are confident in your strategies abilities, don’t touch leverage.
You can also consider testing out your entry and exit strategy by using micro or mini account where you will be able to trade smaller amounts than with a standard trading account.
Key points
If you remember anything from this article, make sure it’s these key points:
- Know your ideal risk/reward ratio before setting goals. This should be one of the first things you do, the basis of strategy.
- Keep strategies simple and follow trends. Work with the market, not against it.
- Exiting is more important than entering. Your profit all comes down to how you leave the market.
- Test your forex entry and exit strategy. Explore different variations, let it grow and perfect it over time.
- Never forget to use stop-losses. Failing to use stop-losses can be devastating.
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