Losing a trade is always a possibility, even if you have done your research, determined the best entry time, and executed your strategy flawlessly, and this can be extremely discouraging. It’s even more aggravating if the deal was supposed to close on time, but something went wrong. What is the cause of this, and what can be done about it? The answer is simple: the trade was most likely not closed on time. Trading without a clear exit strategy can be risky. So, when is the best time to exit a trade, and why do traders frequently miss the best time to close trades?
Why are trade exits important?
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Assume that all circumstances are favourable and you have opened a trade that is performing well — the price is moving in the predicted direction and you expect it to reach your desired outcome target soon. However, when it reaches your target of, say, 20%, you hesitate to close the trade because you expect even better results. What’s the problem with that?
Ignoring the deal’s limits is risky because you could lose both the earnings and the investment you put into the deal at any time. What is preferable: receiving a smaller outcome or risking everything in the hope of earning more? Greed is one of the factors that causes traders to keep a deal open for longer than expected.
Another example is when traders hold on to a losing trade rather than accepting the loss and moving on. Traders frequently set a stop loss and then remove it, hoping that the price will reverse. They wait, and in the meantime, the trade continues to lose money, until the trader is left with a zero balance. Another reason why traders lose all of their money is a fear of losing a portion of their investment.
This is why sticking to your exit strategy is critical — it will protect you from yourself and may help you manage the risks more effectively. Let’s take a look at the various methods for completing a trade on time.
Take-Profit and Stop-Loss
These two levels are effective risk management tools. The Stop-Loss is set to keep the trade running until it reaches the amount of loss that the trader considers acceptable. This allows the trader to manage losses and attempt to control the flow of funds. Similarly, Take-Profit enables a trader to set a profit target that they wish to achieve. The deal will remain open unless it is triggered.
Using these tools may assist traders in determining when to exit a trade. The ratio at which these levels should be set is determined by the trader and their personal strategy; however, each trader must learn the fundamentals of Stop-Loss and Take-Profit usage. Learn how to use these tools by reading our in-depth article on them.
Stop-Loss Trailing
The Trailing Stop-Loss is a Stop-Loss with a slight twist that allows traders to manage potential losses while also optimising potential positive outcomes. It works as follows: a trader sets the Stop-Loss level and activates the “Trailing stop” feature. If the asset’s price moves in the desired direction, the Stop-Loss level will automatically adjust. If the price moves against your prediction, the Stop-Loss will remain in place.
This allows traders to capitalise on positive outcomes while the trend is moving in their favour. Indicators, such as the Moving Average crossover, can detect a possible trend reversal.
Timely exit
While there is less of a defined exit level, traders may consider planning to close the deal after a certain amount of time. For example, it can be used in a flat market or when the deal is losing money. While it may be a simpler method, traders must be confident in their ability to close the trade at the exact time that they’ve set. This approach is better suited for more experienced traders because it is too easy to lose sight of the running trade and miss the right time.
Whatever method you use to exit your deals, make sure you always stick to it and never succumb to the “a little more” mentality. One of the most common reasons traders lose money is failure to close trades on time. Maintain your risk management strategy and avoid unneeded losses by knowing when to exit a trade.
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