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forex exit strategies

Forex Exit Strategies

This section presents important forex exit strategies. The strategies rely on so-called forex technical analysis. In other words, they based on the behavior of the underlying currency pairs and dot include economic aspects involved in the dynamics of the currency pairs  such as trade, capital flows, interest rates, inflation, unemployment and other parameters by which the country’s economics is usually characterized. Although, all these items, as well as the current economic news are important, they are subject of a (possibly long term) fundamental analysis which lies outside the subject of this chapter. This section presents a collection of simple forex exit strategies suitable for skilled beginners of forex and intermediate players.

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Volume and Reversals

Forex volume cannot be evaluated exactly as in the Equity market, where every share equals to one volume so that selling 200 shares is 200 in volume. In the forex market the number of contracts and their size is unknown because the market is wide and decentralized. Therefore to evaluate volume in Forex the number of ticks(changes in price is used). One tick equals to one unit of the forex volume. As it moves up and down volume adds up.

An increase in volume means that lots of participants are actively selling and buying currencies.

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Volume Indicator

An experienced trader usually employs several indicators: one that is based on volume, one based on momentum (like the Stochastic Oscillator), and one based on volatility (Average True Range or Bollinger Bands). Combining these measures gives a “three dimensional view” of the market.

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Strategy Specific Exits

Strategy Specific Exits

Well tuned strategies require well tuned exits. These may include a combination of several exit or may include specific exits for differing scenarios.

As an example this review considers  a strategy based on major news announcement such as the Nonfarm Payroll (NFP) Report. In USD related pairs these reports often lead to large swings. A trader may wish to capitalize on a predicted currency pair movement once the report has been published.

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Exit by Dissolution of Entry Criteria

An often overlooked exit method presented in this review is to exit a position when the original entry criteria no longer exists. This is in particular practical when the forex trader uses technical indicator signals for entry.

Consider a trading strategy which is based on entering positions as volatility increases in an attempt to capture large quick moves. The forex trader may use average true range  forex analysis to assess the a volatility.  The figure below shows how the AUD/CAD volatility rises as a sell-off begins.

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