Friday, January 22, 2016

Forex Exit Strategies: 2 Tricks on Setting Limit Orders

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Exiting a trading position at the right time and price is arguably more important than your entry order; Because only when you exit, you lock in and confirm your profit. In previous videos I've talked aboutchoosing the best currency pairs[1] and best times to trade[2]. I also have devoted a whole lot and identifying trading opportunities a t the Invest Diva video course[3]. Today, let's talk about getting out, WITH profit by paying attention to a small trick when setting limit exit orders in your long term trades.

There are many ways to calculate your exit strategy and it highly depends on your trading time frame, your account's margin and on the market sentiment in general.

Limit orders or Profit Taking Levels are the areas you calculate to get out of your position when the market prices reach your target and you decide to end your journey with that specific trading instrument such as forex currency pairs, stocks or even BitCoins.

Stop-loss orders are levels you choose to exit a position to control risk if it reaches a point where we are unwilling to absorb further losses and are mostly used for short-term trades. Because in long term trades, if you have enough margin and time in hand, you can expect the market to complete a cycle and go back to your entry levels, although it could take months or even years.

At Invest Diva we calculate entry levels, limit and stop loss orders by analyzing the markets from a fundamental, technical, and sentiment points of view, and throwing in your account management, capital analysis and gut feeling.

In forex, you need to set a limit on the  forex dance floor[4] to get out of the market with profit as the currency pairs dance in your predicted direction. Stocks and ETFs are also treated the same.

The technical way to set a limit order is using SUPPORT & RESISTANCE levels[5]. The problem is,  most power traders and professional investors who actually move the market prices[6] by trading huge amounts of money, also know about these levels! And given that the markets often move based on crowd psychology, sometimes the master powers behind currency movements prevent the prices to actually r each those EXACT levels, and the currency pair changes direction before you hit your limit, leaving you empty handed and pip hungry. So, use this trick to stack the odds in your favor:

1. In a bullish position, set your limit order a little below your calculated resistance level. The example below is the USD/CAD monthly chart from 2016, and the pair seems to have completed a Double Bottom pattern[7] over the course of 12 years, now heading back to the highs of back in 2003. The next resistance level after breaking 1.45 appears to be the 1.50 - 1.52 area which acted as a a resistance and a support multiple times between 1999 and 2002. With this long term forex trading analysis, and considering the current fundamental situation of the pair (very low oil prices weakening the Canadian dollar, and US economy being in good shape[8]), we could expect to see these levels being reached within the next few months. However, not precisely these exact levels. The prices could take a turn before reaching the resistance, or could even break above it and test higher prices. The truth is: NO BODY KNOWS.

2. In a bearish position, set your limit a little above your calculated support level: Here we have the GBP/JPY pair which has been divining towards a Fibonacci retracement level[9] at 158. The fundamentals behind it is Bank of England's signals that their economy is not yet ready to for a rate hike, and Chinese economy troubles that have been turning the Japanese Yen into a safe haven for Asian investors[ 10]. Even though based on the Invest Diva Diamond analysis we could see further drops to this level, we would still take caution and set the limit order a bit tight, so we don't have to deal with the losses of a sudden change in the trend.

Theses are very simple, while effective tricks that are actually hard for many traders to follow. The reason is because of greed and fear. Using this trick minimizes your potential profit, which could turn off greedy traders. However you need to keep in mind that forex risk is much higher than your greed, and giving away a little bit of your potential profit could save you from sitting in a losing trade for days or even months.

Our main goal in investing is to make profit, and the road to success is risk management. So don't get caught in your ego, and invest responsibly.

This article was originally published on[11].

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Referenced Stocks:

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