How to Protect your Forex Profits
Forex beginners usually spend most of their time considering how to enter trades but without giving much thought about how they plan to exit them. Experts, on the other hand, pay very careful attention to their exit strategies and always know how they intend to exit their trades even before they open them.
They utilize a number of well-tested exit strategies to accomplish this task. For example, they may decide to exit a position when a technical indicator has achieved a predetermined critical setting, such as the crossover of the Stochastic Oscillator. Alternatively, they may target a price level which they think a currency pair can readily achieve from prior considerations of technical and fundamental factors. Some traders prefer to select a time period within which their targets must be met otherwise they will close their positions.
Many successful traders recommend that once you have entered a trade and have set your profit-targets and stop-losses then you must never change them. However, others do not support this point of view completely. Most certainly agree that you should not keep moving your stop-losses because you will expose your trading positions to increasing levels of risk. Just waiting for price to turn is a precarious strategy that could place your entire account budget in danger.
Profit-targets can be treated in a different way because if you take them prematurely then you are reducing your risk-to-reward ratio. This is definitely not a good strategy to adopt in the long term because letting profits run is a widely recommended trading practice. Consequently, if you detect a trend that will allow you to do this then you are well advised to let your profits run.
However, another important trading condition that can arise is when a position, that you expect to move in a certain direction, does the opposite. Under such circumstances, you should consider reducing the size of your target or even moving your stop-loss towards the opening value of your position (never away) in an effort to reduce your risk exposure.
You should take special caution if you find the following trading conditions are present. Imagine that you have set a short entry in anticipation that price will rebound from a resistance level. However, although a bounce does occur and your short is activated, price then resumes moving back into its original long direction. If this happen, you need to consider closing your new trade immediately and minimizes your losses.
You need to become very experience at chart studying in order to provide yourself with the maximum protection against such trading patterns. You then need to know how best to respond to them so that you can achieve the best risk-to-reward ratio as possible. One of the most heart-breaking experiences of Forex trading is to watch a sizeable profit vanish before your eyes. This situation is the woe of many Forex traders and can be attributed to poor money management and greed. The following diagram shows such a trading situation.
One of the most important concepts of Forex Trading is to protect your profits. You are far wiser to accept smaller profits of just a few pips than to expose yourself to large potential losses. Successful Forex traders were first great survivors before becoming big earners. As you are risking your own money you need to protect it as a top priority.
Safeguarding your profits is a skill that you need to acquire. For instance, at what particular profit level do you need to record before you consider moving your stop-loss to break even. This would be a desirable action because from then onwards you would be trading risk-free. If you move too soon then you will increase the risks that your position will be prematurely stopped-out.
If this should happen then you may watch in frustration as the price moves back in its original direction. Alternatively, if you wait too long then you could leave yourself vulnerable to a large price correction. Always remember that achieving Forex success is simply the art of accumulating more winners than losers. Many traders, especially novices, do not even consider viable exit strategies at all. However, an exit strategy supported by good money management is vital to your success.