1. Exits are more important than entries
Forex traders often over think about when they should enter a trade. Huge amounts of time can be spent looking at indicators, reading news, and drawing lines on charts to try and figure out if now is the perfect time to open a trade.
Unfortunately for them they should be focusing some of that energy elsewhere.
It is true that a good entry into a trade is important. For example opening a new ‘long’ trade when the price has massively spiked is probably a bad thing, as the price will probably reverse just as quickly.
What is more important is when you exit the trade. It is at the time of exit that your trade becomes either profitable, non-profitable, or breaks even. It doesn’t matter if you were up 10% one hour ago. If you close the trade when you are down 2% then that is the final result. Being right about the price direction for the much of the trade duration gets you no profit if you closed the trade after a large reversal.
By all means spend time working out when to enter a trade – this is an important thing to do. But do also spend time thinking about when to exit. Don’t just exit in a panic. You should have a plan and then stick to it.
Which brings us onto…
2. Have your trade lifecycle planned out before you enter
Some people treat trading like a computer game, just clicking on the buy and sell buttons in the hope that they will make money. These people will probably find that their account balance goes down very quickly.
Blindly entering and exiting trades without having any real plan in place is only going to lead to one thing – a smaller bank account balance!
Before entering a trade you should know:
- Why you are opening this trade?
- How long you expect the trade to go on for?
- At what level would you either take profit or tighten your stops?
- At what price would you accept that your initial analysis was wrong and exit the trade?
Many traders find that small losses become large losses because they haven’t planned their trade in advance. They just entered the trade without thinking it through. The trade goes against them, and rather than exiting they stay in the trade hoping that it will turn around. Does this sound familiar?
If you are unable to trade in a disciplined way then you will consistently lose money to those traders who are able to trade with a disciplined methodology.
Trading with a disciplined methodology means trading with a plan. A plan means having answers to the four questions above – and then sticking to the plan!
The 4th question is about knowing when the trade has gone wrong so you can exit. The next tip covers an important aspect of planning your exit.
3. Have a stop loss in place in case it all goes wrong
As covered in my previous blog post about stop losses, a well thought out stop loss can be worth its weight in gold. It can stop you from losing large amounts of money, and enable you to ‘lock in’ your profit.
A stop loss should initially be the record of your trading plan’s worst-case exit price. Placing a physical stop loss is much better than using a ‘mental stop loss’ as the physical stop loss isn’t affected by your emotions.
As the trade progresses then you should tighten the stop loss according to your trading plan. What you should not do is decide to loosen your stop loss because you want to stay in the trade for longer.
Loosening a stop loss, or removing it altogether after it has been placed is a sign of not having control over your trading.
4. Monitor your trade appropriate to the timeframe
Unless your trade’s exit points are always determined by a stop loss and limit order that you placed your trade will require monitoring whilst it is in progress.
You should monitor your trade in a way that is appropriate to the timeframe in which you are trading.
If you are trading a small timeframe such as 1m, 2m, etc, then you obviously can’t afford to leave the screen or room for a few minutes as you might miss an important exit signal and end the trade in a loss. At very small timeframes even going to the toilet can cost you real money!
If trading longer timeframes such as 1h, 4h, 1 day, 1 week, etc, then you really shouldn’t be spending large amounts of time staring at the screen watching your trade. Doing this will turn you into a nervous wreck as the price continually moves up and down. Trading at a longer time frame should mean you don’t need to know about such micro-movements of the price.
5. Understand how much money is ‘on the table’
No matter what you are trading you should always have a thorough understanding of just how much money you have at risk.
Don’t just think about the potential profit. Think about the potential loss. Think about the worst case scenario. How much money could you lose? If you are not comfortable with the figure then you are trading with positions that are too large for you.
You should always be able to withstand all your positions going against you at the same time, no matter how unlikely it may seem. If you can handle it (note – just handle it – you don’t have to be happy about it!) then you are trading at an acceptable level.