Entry and Exit Strategy in Forex trading

How to develop an Entry and Exit Strategy in Forex Trading

A successful Forex trading strategy begins with developing a well-thought-out entry and exit strategy. Despite knowing when the value of a currency pair will rise or fall, it is unlikely to be profitable until you know when to enter and exit the market. An entry and exit strategy helps you decide when/where to enter the market and at what point would be best to exit.

Forex traders who strictly follow a predefined plan are more likely to be successful than those who trade without one and those who let their emotions decide. No amount of successful trade analysis is worthwhile if you can’t determine good trigger points for your trades. Similarly, even if the analysis that justified the opening of a position is incorrect, mastering an entry and exit strategy may still enable you to achieve positive returns due to the high volatility of the forex market.

Introduction to Entry and Exit Strategy

As you formulate a Forex trading plan, it’s very natural to be concerned about what if the plan doesn’t work out? What if I’m wrong? Then you end up buying or selling at the wrong time, and your forex entry and exit strategy will be ruined.

For Forex beginners, it is highly recommended that they develop a tight entry and exit strategy. This way, they know they are always in control of their capital. Hopefully, they will also avoid suffering larger losses along the way as profits come more gradually.

Even experienced Forex traders sometimes make mistakes when it comes to timing their trade orders. Every trader would be a millionaire if there were a completely foolproof strategy. However, an effective entry and exit strategy will put you on the side of probability, contain your risk, and ensure you make profits.

How to develop an Entry and Exit Strategy

The forex entry and exit strategy can be implemented in many different ways, but there are some basic things every trader needs to take into account. Let’s take a closer look at them individually.

1. Choose a time frame for your trades

To be successful in Forex Trading, you need to have a strong grasp of timing, which will allow you to decide when to enter a trade, when to cut losses, and when to exit your trading positions exactly when they reach their peak. To ensure that you trade at the most optimum moments, an organized approach to time management is vital. 

It is important that you should set your entry and exit strategy according to your timeframe. For day traders and scalpers, long-term entry and exit strategies won’t be of much interest. While for the long-term traders, it is the opposite. It all boils down to this: Are you a trader, an investor, or somewhere in between.

It is also important to consider the forex market volatility along with the timeframes. While some entry and exit strategies may be effective in highly active markets, others may work well in ranging markets.

2. Take advantage of market trends

The importance of mastering the forex trend analysis when considering any type of forex entry and exit strategy cannot be overstated. You probably already know that trading forex entails buying low and selling high. However, if you do not know when these moments will occur, it is impossible for you to have a strategy.

Trend analysis helps identify and predict price trends, which in turn allows you to make trading decisions. For example, you can buy in a trend uptrend and sell in a trend downtrend until a trend reversal is indicated.

Knowing how to analyze the trends work lets you identify potential entry and exit points and build your strategy around them. Traders should be aware of how markets repeat themselves so that they may manage their expectations in relation to current market conditions.

Trend analysis is one form of forex technical analysis, that is based on the idea that historic price movements give traders an idea of what will happen in the future. This type of analysis can be applied to any time horizon, whether it is short, medium, or long-term, making it suitable for different trading styles.

3. Create a simple entry and exit Strategy

It is crucial to keep your forex entry and exit strategy as simple as possible. This way, it will be easier for you to learn and replicate. Do not include too many variables or chances for error. There is a greater risk of something going wrong if you have more elements in your forex entry and exit strategy.

Simpler strategies allow you to eliminate ineffective components. The more complicated the strategy, the more difficult it is to figure out what isn’t working. Furthermore, simple strategies are less stressful to implement. You will be able to trade better if you remove unnecessary stress because you will think clearly about what you are doing and you will feel less pressured.

4. Stop-loss orders are a must

When you are about to enter or exit the market, be sure to have your stop-loss orders ready. It’s best to place your stop-loss as soon as you enter the trade.

One effective way is to set them past the support level. If you do so, you will likely exit where the majority of your peers do. You can increase your stop-loss to a higher level if more favorable conditions appear since entering the market, improving your chances of profiting. Trailing stop orders are also a better way to accomplish this. Stop-loss orders of this kind adjust themselves if the market price rises but remain unchanged if the market price falls.

You can also use stop-losses if the value of your currency pair is above your reward and you hope to make a greater gain. Wait for the price to pass it and set your stop-loss order at that price. It’s called a protective stop. This way, you still achieve your exit point even if the worst-case scenario occurs. Stop-loss orders can be extremely effective if you use them creatively.

5. Calculate the Risk/Reward ratio before trading 

A Forex entry and exit strategy cannot be separately devised. Their relationship is best expressed through the risk/reward ratio. Risk/reward ratios measure how much profit you can make on a trade, compared to your initial risk. 

forex strategy entry and exit - AximDaily

This is calculated by setting your initial target stop and profit objectives. As an example, if you risk $1 to make $3, you would have a risk/reward ratio of 3:1.

To be successful in trading, it can be beneficial to only place trades with a certain risk/reward ratio in your trading plan. For longer-term positions, you should only take trades with a risk/reward ratio of 3:1, while for shorter-term positions a risk/reward ratio of 2:1 is recommended.

How to choose an Entry Point in a Forex Trade

An entry point is the price level at which you decide to open a buy or sell position. A proper entry point can be defined through market analysis, and based on the trading strategy you adopt. It can maximize your profits in each trade, and that’s why professional traders follow strict rules to find the best entry points for their positions.

No matter what type of trading strategy or market environment you choose, you will always have to know how to enter the market, what type of confirmation to look for, and where your exact entry point will be.

Importance of choosing a Forex Entry point

Every forex trader employs a specific strategy to trade successfully. It might be a supply and demand trading strategy, a price action trading strategy, an Elliott wave trading strategy, or another. Though all Forex traders are familiar with potential trading areas, most do not have the perfect entry strategy to find those opportunities.

Instead, they trade blindly. It’s the same thing as crossing the street without looking both ways. While they have profitable trading strategies, they do not know how to determine entry and exit points. The following questions probably cross their minds frequently:

  • What’s the best time to enter a trade?
  • When and how should I enter?
  • Have I entered too early?
  • What should I do if I entered too early?
  • How should I proceed?

Forex trading would be a lot easier if traders knew the answers to these questions. Unfortunately, they don’t. The following strategies will help you how to identify entry and exit points, and when to pull the entry trigger. Let’s dive in.

Effective ways to find a Forex Entry point

The more precise you set your entry and exit points, the more likely your forex trading system will succeed. While almost all entry methods work, each works differently depending on your set-up, psychology, objectives, and market type. Let’s discuss some efficient ways your can use to find an exact Forex entry point.

1. Candlestick Pattern

candlestick pattern can be used by traders to pinpoint entry points and signals in forex trading. Candlestick patterns calculate the exact entry price at which to predict the future movement of the asset’s price. As a result, traders are more likely to succeed. Traders use it as a trigger for trade, making it the most popular component of technical analysis. 

Traders with extensive experience frequently use the engulfing pattern and the shooting star pattern. Below is an example of how the hammer candlestick pattern can serve as an entry trigger for a reversal of EUR/USD. 

entry and exit strategy in forex trading

The hammer pattern alone is not enough to confirm an entry point. It is equally important to identify the entry point as identifying the candlestick pattern. By establishing entry points for a candlestick pattern, traders will risk less and have a greater chance of success.

2. Chart Pattern

The use of forex chart patterns as entry signals is one of the most popular trade entry strategies. Chart patterns are price formations on a chart that are used to predict price direction based on historical data. Their analysis helps traders to identify bullish and bearish forces in the market. In this way, they can predict everything before it occurs, enabling them to ride it out.

forex chart pattern - AximDaily

Chart patterns are divided into three main types:

  • Continuation Patterns: indicate the continuity of the ongoing underlying trend.
  • Reversal Patterns: indicate a reversal of the current underlying trend.
  • Bilateral Patterns: indicate that the price can move either way. They are very common during high volatility and uncertainty.

Recognizing these patterns allow traders to open the right entry point.

3. Breakouts

Traders use breakouts as entry signals for their trades more than any other tool. A breakout trade involves identifying key levels and taking advantage of them as markers. Using breakout strategies effectively requires price action knowledge. Breakout trading involves forex prices moving beyond a delineated level of support or resistance.

entry and exit strategy in forex trading and breakouts - AximDaily

As a result of their simplicity, breakout entry points are suitable for novice traders. In the following example, we show a key level of support (red), following which a breakout occurs along with increased volume that further supports the move down. Entry is triggered when support is broken. As another option, traders look for a confirmation candle close outside the key level.

How to choose an Exit Point in a Forex Trade

An exit point refers to the price level at which you need to close your trade. You can exit the market with a gain or a loss. Setting a proper exit point is a crucial risk management tool to minimize your loss if occurred. Keep your risk/reward ratio low, most successful traders keep it as low as 1:2. The outcome of your trades will depend on how you choose both Take Profit and Stop Loss levels according to your trading plan. 

The Take Profit level (T/P) is the profit level at which a trade will close, while the Stop Loss (S/L) is the price level at which a trade closes automatically when the market reverses. A Take Profit level is set above the current asking price if you are buying a pair, or below the bid price if you are selling. While a Stop Loss price is set above the current asking price for long positions, or beneath the current bid price for selling positions. In contrast, it is important for traders to learn the difference between order types and how the order execution takes place.

Effective ways to find a Forex Exit point

While the majority of Forex traders place a great deal of effort into spotting the right moment to enter a trade; the exit point of trade will ultimately determine how successful the trade is. Below are the three effective exit strategies that Forex traders should consider when attempting to exit a trade more profitably.

1. Using traditional Stop/Limit orders (Support & Resistance)

Setting targets (limits) and stops at the same time as entering a trade is one of the best ways to keep emotions in check. Using a ‘stop loss’ is a better approach than entering without one and watching losing trades consume all of your account equity while wiping sweat from your forehead. Read Stop Loss and Take Profit Explained for detailed insights

A trader should analyze the risk they are willing to accept before entering the market, then place a stop-loss order at that level, along with a target at least that many pips away. A stop-loss order will be activated and automatically closed when traders move in the opposite direction. A similar result would be achieved if the price reached the set target. Traders can exit in either case.

Entry and Exit Strategy in Forex Trading and Forex Education - AximDaily

Remember that both stop loss and take profit orders will remain adjustable while your trade is active. However, setting both levels while opening an entry point is much preferable.

2. Using Moving Average trailing stops

A moving average indicator is well known for its usefulness as a filter when determining what direction a currency pair has trended. Trading opportunities arise when a price is above a moving average, while selling opportunities arise when a price is below a moving average. Alternatively, a moving average can also serve as a trailing stop.

Using Moving Average trailing stops

It’s basically an idea that if a moving average crosses over price, it means the trend is changing. When this happens, trend traders close their positions. That’s why it might be a good idea to set your stop loss on a moving average.

3. Volatility based approach using ATR indicator

This last technique uses the Average True Range (ATR). The ATR indicator is used to measure the price volatility by calculating the range between highs and lows. This chart tells traders how erratic the market is behaving based on the average range between high and low over the previous 14 candles, and this can be used to set stops and limits for each trade.

Volatility based approach using ATR indicator - Learn Forex AximDaily

The greater the ATR on a given pair, the wider the stopping point should be. The reason for this is that a tight stop on a volatile pair could get stopped out too early. Additionally, setting too wide stops for a less volatile pair means taking on more risk than necessary.

An ATR indicator is universal since it can be applied to any timeframe. The stop should be set slightly above 100% of ATR and the limit should be set at least as far away as the entry point.

How to Develop an Entry and Exit Strategy 

When it comes to developing an entry and exit strategy in Forex trading, there are several factors that need to be considered. It’s important to decide what type of trader you are, as your trades will be decided upon time horizon and potential risks. If you’re a day trader or a short-term one, then you’ll need to monitor your trades carefully and strictly identify your entry and exit points. But if you are trading long-term positions, you shall be more patient, as your gains will be more significant.

Another factor to consider is how much you are willing to risk. When you calculate your risks, you identify the level of acceptable losses before trading. This will help minimize any possible losses while keeping you safe from stressful trading. 

For short-term traders, a lower risk ratio is more favorable as they make money on the volume of winning trades. On the other hand, long-term investors may prefer a higher risk ratio as they seek to maximize profits for each position.

You may also need to keep your strategies simple and follow trends; trade with the market, not against it. Setting your exit point is more important than entering as your profits depend on how you leave the market. Consider testing your entry and exit strategy, and never forget to use a stop-loss. 

Testing your Forex Entry and Exit strategy

The moment you think you have a potential entry and exit strategy, you have to find an appropriate environment in which to test it. It may be advised to practice implementing a strategy on a demo account, but we do not recommend it. The reason is that a demo account does not reflect the real market conditions.

In most cases, demo accounts automatically submit orders to the market without considering slippage, as they would in a real trading account. Traders who test their entry and exit strategies on a demo account are often disappointed when they realize that in real circumstances they don’t work and end up losing money because of it.

As we mentioned before, the feeling of entering and exiting the market is an extremely important element for many beginners, and testing your strategies without it is not really valid. Instead, we suggest you test your strategy in a real environment, but with a small amount of money, like a Cent account.

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