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Managing your trade :Exit strategy

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I am not the inventor of this strategy. It is widely available on the internet, and I have no idea who was the originator. I have found it to be effective when using simple support/resistance methodology to manage trades.  

The Simple Exit Strategy

This is an exit strategy using a 5-min chart, however, it can be easily applied to any time frames. The basic idea is to use a lower time frame (about 4 to 6 times lower than the trading time frame) to manage a position and using support resistance to define a better exit. For example, if you are trading the hourly trend, you can apply this strategy in M15/M5 to manage your position. I’ve found this strategy to be useful in my Forex trading.

Rules:

  • When previous resistance becomes support, it is time to consider exiting a SHORT position.
  • When previous support becomes resistance, it is time to consider exiting a LONG position

The EURUSD trade below is a good example to illustrate this strategy. Assuming we entered a short position at 1.27, and the market started to sell off, we decided not to set a hard profit target, instead, we follow the price action to decide when to exit. Looking at the chart below, without a planned strategy, where would you exit? chicken out when there were small price bounces?

Here is the idea. In a downtrend, prices will form lower highs and lower lows. And previous support acts as resistance. By following this principle, we let the profit run until the previous resistance level was violated and becoming a new support level. This signals a potential trend change.

Again, no strategy is perfect, we might still miss out on some even bigger profits. However, in my personal opinion, it is good enough to manage short term position. Have a look at this method.

Below is the hourly chart of USDJPY to illustrate this strategy:

exit strategy chart

The best forex trading strategies are the ones that know when to be aggressive (letting the profitable positions ride) and know when to exit promptly (to cut losses or take profit.) By using the simple concept of support and resistance, traders will be able to map the market and manage a position effectively.

This post was originally written back in 2010. I have updated with an up-to-date chart and refined the strategy.

Video: Trading Lesson of the Week – Trading is a Skill

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This is a short trading lesson from Bella (@smbcapital), the author of One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Wiley Trading)
(I highly recommend the book). Trading is a skill. “The answer is, you develop your trading skill day by day”. Excellent point.  Watch this after you have summarized your trading week.

About managing trades

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I came across Tim Morge's articles on MoneyShow.com which he talked about how successful traders manage their trades. Though he quoted median line trades in the articles, he did point out some important tips for trade management. I thought it might be helpful for my readers as well. Check it out.


The clearest thoughts you'll have about a potential trade is before you enter it; once you enter the trade, the clarity of your focus declines for many reasons:
    

  1. You have been staring at the screen for some time, stalking the trade (and of course, once you enter the trade, you are watching the screen even more intently, so the longer you are in the trade, the more focus you have spent).
    2. 

  2. Once you enter the trade, you have a financial interest in the trade; in many traders, that heightens their interest, but at a cost of burning their available focus at a faster rate.
    3. 

  3. Once you have a financial interest in the trade, you feel the weight to make money (some call this the fear and greed factor). You feel elated with each tick in your favor and you feel depressed by each tick that goes against you.
    4. 

  4. As a trade progresses, you are pulled by the price action to intervene and change your original idea; with each ebb and flow of price, a new way to improve your original trading plan pops into your head.
    5. 

  5. If a trade heads towards your stop loss, you become more and more certain you have taken a losing trade and the internal pressure to intervene and cut the loss quicker increases. Even if you have learned to hide your stop loss orders behind market structure, you feel the pressure from these urges to exit these trades earlier, at a smaller loss, even though many of your trades that travel into losing territory often would have survived by a few ticks (because of your use of market structure as protection).
    6. 

  6. As prices move in your favor, you feel the urge to lock in profits at the slightest slowing of price in your favor. You need a win and the thought that this trade may back up and turn into a loser weighs on your mind, clouding your judgment.
    7.