Fear and regret are the worst feelings traders suffer. They appear in different situations, and exit points are one of them. Newbies doubt every decision, so they often exit the market earlier to keep their funds. How to exit trades being sure it’s not fear?
Every trade’s exit strategy is based on the risk/reward ratio. It reflects the proportion of potential gains against potential losses. The bigger the ratio is, the safer of an approach you have.
1. Poor time management
Many beginner traders start closing trades as soon as a price moves in the opposite direction of their forecast. However, it’s vital to understand that the price doesn’t just grow in an uptrend and only fall in a downtrend. The chart below shows a middle-term uptrend on the daily chart of the EUR/USD pair. As you can see, there are bullish and bearish candles.
A rule: determine when your trade is supposed to be closed. If you buy on low timeframes and plan a 30-minute trade, you shouldn’t close your position if only one 5-minute candlestick closed down.
2. No confirmations of a trend change
Another sign you’ve exited a trade too early is related to the previous one. Even if the price turned around, but there is no confirmation it will continue moving in that direction, you shouldn’t exit the market. To be sure the market is going against you, use trend indicators, including moving averages, Bollinger Bands, and ADX. Another sign is the formation of chart or candlestick patterns. However, the best trade exit strategy is to set support and resistance levels and exit the market only if the price fails to rebound from them.
Remember: there should be at least two candlesticks to doubt a price direction.
3. No reason for a trend change
It’s also vital to understand why the market moves against you. If you trade on short-term timeframes, finding triggers for a particular price movement may be challenging. However, if you consider high timeframes, you can recheck the news to find out whether there are reasons to close a trade or if it’s a short-term price reversal.
The majority of the news is usually predictable. For instance, you always know when economic data will be out, when the presidential election results will be published, etc. If you are a beginner trader, you should avoid trading on the news and events.
4. Haven’t reached a take-profit order
The best way to exit a trade is to set a take-profit level in advance. You should evaluate market conditions and set a take-profit order according to the risk/reward ratio and your strategy. After you set a take-profit order, you shouldn’t change it. Most conclusions made when a trade is open are wrong because a trader makes decisions based on emotions, not accurate calculations.
5. Haven’t reached a stop-loss order
Some traders place a stop-loss order to limit potential losses but close a trade before a price reaches it. It happens because they believe they can minimize losses even more. However, a price may turn back before reaching a stop-loss level. Therefore, you should set the stop-loss level in advance, calculating the potential loss so that it doesn’t negatively affect your balance and won’t trigger an early exit.
There are several indicators that reflect price volumes — how strong buyers and sellers are. For example, if a price turned up after you opened a sell trade, but a volume indicator reflects the weakness of buyers, you shouldn’t panic. The indicator says buyers won’t have enough strength to push the price further.
To know how to enter and exit trades, you should have a well-developed strategy. Test strategies on a demo account or historical data and stick to your first decision. Only by following particular rules will you avoid mistakes in trading.