June 17, 2009
Forex Exit Strategies: The Two Part Exit Strategy
In forex trading the exit strategy really is very important. Many people spend all of their time developing a winning system, and then once they've done so they will employ a strict stop loss policy to minimize their losses. However they will then neglect the exit strategy because they are just happy to be making some money, but in the long run you really do need to develop an exit strategy that will maximize your gains.
One of the very best strategies you can use is the two part exit strategy. This is the exit strategy I use myself when I'm trading my 4 hour trading system, and it's arguably the main reason why this system is so profitable.
I mainly trade the GBP/USD, EUR/USD and USD/JPY pairs using this method and my exit strategy is always the same. As soon as the position is in profit by 50 points (or 40 points if trading the USD/JPY pair) I will close half the position and let the other half run, moving my stop loss up to break-even.
This way not only do you guarantee a profit from nearly every trade you enter, but you can also get yourself into a free trade position with the second half of the position very early on, so you can hold out for the really big gains if you so wish.
The great thing about this strategy is that even if a trade doesn't work out, it will nearly always move at least 50 points in your favour before reversing, so you will often profit from the bad trades as well as the good ones.
This is exactly what happened yesterday on the GBP/USD pair. The EMAs that I use for this particular strategy crossed upwards on the 4 hour chart and I went long at 1.6402. This trade didn't work out as planned but it still went up around 70 points which was more than enough to bank my usual 50 point profit with half the position. The stop loss for the second half of the position was then moved up to break-even and it was later triggered, but this was still a profitable trade overall because of the two part exit strategy that I use.
The hardest part is deciding where to exit the second half of your position when trades do move in your favour. This is probably where my system could be improved slightly, because I usually exit a position based on gut instinct mainly, using a few technical indicators in conjunction with established support and resistance levels as guidance.
However the overall point I want to get across is that you really should consider using a two part exit strategy when trading forex because this will allow you to target the really big points gains whilst also ensuring that you still make some money from the less successful trades as well.
This is a strategy that many of the professional traders use, and if you want further proof of this you only have to look at the new Forex Income Engine 2.0 course from Bill Poulos. Each of the three day trading methods included in this course use a two part exit strategy in much the same way.