Regardless of what Forex trading strategy you use to pinpoint your trades, most of the time the entry point to a trade is the easy part. Whatever your preferred Forex system, there are usually set criteria that you will be looking for, which signal to you when you should place a Forex trade.
However, unless you are running a tight 'Scalping' strategy in your Forex trading, where you might have a Limit Order set up to automatically take you out of the trade after 10 or 20 points, then you have to manage the trade and have a strategy to decide when to close out and hopefully take your profit.
Sadly, neither the Forex, nor indeed any other financial markets, move in a smooth line (otherwise we would all be enormously rich!) and typical patterns, consisting of a move followed by a retracement or indeed a sustained move in the opposite direction are all part of a normal trading day. Therefore, unless you have psychic powers of being able to predict the exact tops and bottoms of a market move (and if you have, I would love to hear from you!), then you need to be able to put rules in place to determine when you should exit your trade. Too many times, Forex traders have allowed their profits to bleed away from good trades, because they didn't have a strategy to know when to exit.
For me, as a technical trader, one of the simplest and most effective tools to determine a trade exit is the simple Moving Average. This will never allow you to get out of a trade with the absolute maximum profit, as this is impossible, but if used sensibly, then it can lead to locking in steady profits over time.
Moving Averages (MA)
A Moving Average is a technical indicator, which shows the average market price value over a set period. For example, if you were trading a 5 Minute chart, then a 10 Period Moving Average line would show the average price of the market over the last 10 x 5 Minute periods, i.e. 50 Minutes. This is portrayed as a line on your chart (usually to a colour of your choice) and will feature as an available indicator on any good charting package. It is standard practice to use two or three different MAs on the same chart, for example 5, 10 and 20 and these will be used to show trend movements of the price within the particular chart. The smaller the MA, then the closer the line will be to the current price and the larger the MA, the further away from the current price.
Different MAs suit different currency pairs, but if you look at a historical chart of your preferred currency pair and play around with different MAs, you will be able to see which ones sit smoothly alongside the price action of a move for the majority of the time without the actual price crossing and closing on the other side of the line.
Once you have determined which ones suit your chosen pair, then you can use them as a guide to exit the trade. For example, if you had chosen the 10 period MA as your exit line, you could remain in your trade until the price either breached or closed through that line, depending on your chosen strategy. It is a fine balance between risk and reward - the smaller the MA you choose as your exit line, the closer to the actual price you will be and therefore you will lose less profit at that point in time, if the line is breached. However, because the market moves in a jagged fashion, it may be that as soon as it breaches the line, that the market then turns again in your desired direction, and had you chosen a larger period MA, you would still be in the trade and would ultimately possibly make additional profits. You never know exactly what the market will do and therefore you have to make your choice based on your best judgement of the historical Forex data available on the charts.
However, whatever choice of MA you do make as your exit indicator in your Forex trades, you must be disciplined and stick to the system. Over time, if you have done your historical analysis correctly, you will then find that the averages will work in your favour in your Forex trading and you will be able to lock in your profits.
Peter Burgess has been a succesful Financial Trader for over 3 years, focusing on the Forex and Indices Markets and he wishes to pass on the strategies, hints and tips which have helped him as a trader. Read more helpful Forex Tips<
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