Timing is critical in forex trading. Traders should determine the right time to enter a trade to keep up with their preferred price movement and earn profit from their trade. Again, traders need to understand when to exit a trade to avoid suffering huge losses.
Exiting too early puts you at risk of missing supplementary price action that you would have leveraged to increase your profits. Still, overstaying in a position exposes you to losses, especially after a price movement reversal. Read on to learn about forex exit indicators you can use to reduce your risk of loss.
1. Exiting a Trade is Crucial
Skilled traders understand why exiting a trade just before the climax of their possible profit is critical. Foreign exchange exit indicators come in handy to provide the information and foresight you require to determine the appropriate exit moment. Exiting early allows you to earn some profit from your trading activity. If you are not yet conversant with these indicators, consider practicing various strategies to determine the best indicators for your needs. Let’s discuss some commonly used forex exit indicators every trader should use.
2. Moving Average Stop
Moving average is a user-friendly exit indicator for both experts and beginners in the forex trading industry. Traders can leverage this tool to make informed trading decisions. When a currency pair price movement drops below the moving average, it will illustrate a sell position. Traders can use it as an alert to exit an open position.
When prices surpass the moving average, that could indicate a considerable change in the currency pair trend. Apart from its use as an exit indicator, traders can use the moving average to determine purchasing opportunities when currency pair prices surpass the MA trend line.
Traders who want to have simpler exit moments while securing their desire to hold on to an open position can place a stop loss below their currency pair’s moving average. Should the price fluctuate and drop the preferred number, then a trade may be applied automatically to reduce losses.
The stop-limit is a standard exit approach that allows traders to keep losses at bay when prices fluctuate contrary to their expectations. If you are a beginner in the forex trading world, a stop-limit is ideal, seeing that it eliminates the decision-making process. Doing so safeguards you from making abrupt decisions that could lead to losses.
To leverage the stop limit strategy, you need first to determine the resistance and support lines from a currency pair’s price movement. You can then place a stop right below the support line to outline a precise exit should the price drop below the support.
You can also put another stop close to the resistance line to trigger an automatic exit once your trade hits a particular profit level. A stop-limit provides an ideal exit regardless of the price movement direction. It guarantees you a manageable loss of a reasonable profit.
4. Average True Range (ATR)
The ATR (Average True Range) indicator calculates overall volatility and sets limits and stops depending on general market behavior. A more extensive average true range should have a broader divide between your preferred limit and stop seeing that increased market volatility will result in unstable price fluctuations.
Setting an overly narrow range makes your position vulnerable to closing prematurely and increases the risk of incurring a loss. Choosing an overly low limit exposes your position to closing prematurely and increases the risk of losing your profits.
Traders can use ATR across different time frames based on the duration they plan to hold on to their position. Place stop-loss above the full average true range and ensure a similar distance between the ATR and entry point for the profit limit. Doing so allows you to indicate a realistic profit target based on the currency pair’s volatility.
5. Relative Strength Index (RSI)
The RSI is a critical tool that depicts when currency pairs are oversold or overbought. This indicator is adequate for assessing a currency pair’s trading action to establish whether you need to exit before a significant price fluctuation.
If a pair’s RSI is overbought, a trader can leverage this indicator to quit a position before the pair’s price action drops, causing a weakening of price. Many traders use RSI together with other indicators like moving average price to make more informed trading decisions.
The more you trade, the higher you increase your chances of identifying the ideal exit indicators that work best for you.