Many forex trading strategies focus on finding opportunities to enter the market, but neglect to understand how to exit their positions at the right time.
Nonetheless, traders must learn how to determine entry and exit points in forex to preserve profits and avoid excessive losses, like using forex exit indicators.
Let’s explore how traders use forex exit indicators.
Nonetheless, traders must learn how to determine entry and exit points in forex to preserve profits and avoid excessive losses, like using forex exit indicators.
Let’s explore how traders use forex exit indicators.
What is an exit indicator?
An indicator uses market data to offer insight into the current conditions, but you can also rely on the same indicators to decide when to exit a forex trade. Good exit indicators are useful across several types of assets and markets, including:
Forex markets can experience quick reversals or breakouts that necessitate a quick exit.
Shares usually require you to exit within market hours to maximise profits.
Indices can drop significantly during early trading hours, so you need to have well-tested exit indicators.
Metals like gold and silver require precise timing if you use them for day trades.
Energies like oil are very volatile, requiring you to watch closely for exit signals.
Cryptocurrencies are unpredictable, so you must exit at the earliest sign of coming volatility.
How and when to set an exit strategy
When setting an exit strategy, you want to think of how to enter and exit a forex trade simultaneously. Here are some tips to get you started:
If you enter with a specific set of indicators, use the same tools for the exit point. Indicators inform you when conditions are right to enter the trade and will tell you when conditions for a favourable trade have changed.
Use the same timeframe for entry and exit.
When you enter a trade, set the levels necessary to exit the trade, like defining the levels the indicators need to reach to exit the trade.
Best exit indicators for forex
Here is a look at the exit indicators forex traders can use to time the closing of their trading positions.
RSI and Stochastic Oscillator
These indicators measure the supply and demand for the asset. You can find out when the market is overbought and oversold to get an early start on predicting when there will be a price reversal. They work for both entry and exit in the forex and CFD markets.
Both RSI and Stochastic Oscillator charts have a scale from 0 to 100. Levels below 30 are considered oversold; levels over 70 mean the market is overvalued. The oversold and overbought values for the Stochastic Oscillator are 20 and 80, respectively. You can use these scales to determine your exit signal.
If you opened a long position when the RSI was at 30, 70 would be your exit signal. For the Stochastic Oscillator, 80 would be the exit point. You can reverse the exit line for a short trade, with 20 or 30 as the levels at which you should close your position.
Both RSI and Stochastic Oscillator charts have a scale from 0 to 100. Levels below 30 are considered oversold; levels over 70 mean the market is overvalued. The oversold and overbought values for the Stochastic Oscillator are 20 and 80, respectively. You can use these scales to determine your exit signal.
If you opened a long position when the RSI was at 30, 70 would be your exit signal. For the Stochastic Oscillator, 80 would be the exit point. You can reverse the exit line for a short trade, with 20 or 30 as the levels at which you should close your position.
Moving average
Moving averages are chart overlays that measure price changes over a defined time. The basic principle behind moving average indicators is that traders look for buying opportunities when the price is above the moving average and look for selling opportunities when the price is below it.
If you use Candlestick or other bar charts, you will look for the market to close below the moving average.
It is also possible to use two moving averages: one that measures a shorter timeframe and one that measures a longer one. For example, you could choose 5-period and 20-period moving averages. When the 5-period line crosses above the 20-period line, it is a buy signal. You would then wait for the 20-period line to cross back over the 5-period one to exit your trade.
If you use Candlestick or other bar charts, you will look for the market to close below the moving average.
It is also possible to use two moving averages: one that measures a shorter timeframe and one that measures a longer one. For example, you could choose 5-period and 20-period moving averages. When the 5-period line crosses above the 20-period line, it is a buy signal. You would then wait for the 20-period line to cross back over the 5-period one to exit your trade.
Average true range (ATR)
Average true range (ATR) is a volatility indicator calculated on a per-period basis, then has a 14-period moving average calculated of its values to provide a smoothing and visual effect.
By calculating the most recent market volatility, traders manually calculate where their stop should be. For instance, using round numbers, if a buy signal was generated when the security was at ten and the ATR was then at two, the stop would be placed somewhere below 8 (being 10-2). On a short trade, if a sell signal was generated at ten and the ATR was again at two, the stop would be placed above 12.
By calculating the most recent market volatility, traders manually calculate where their stop should be. For instance, using round numbers, if a buy signal was generated when the security was at ten and the ATR was then at two, the stop would be placed somewhere below 8 (being 10-2). On a short trade, if a sell signal was generated at ten and the ATR was again at two, the stop would be placed above 12.
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Frequently Asked Questions
An exit buy signal is a forex exit indicator that tells you when to exit a short position.
In short trades, you profit when the market goes down. When you enter a short position, you technically take the "sell" side of a trade. In other words, you enter the position by selling. Therefore, when it is time to close the trade, you will exit the position by taking the buy side of the trade. In essence, you exit by buying.
Exit buy signals may include the RSI reaching an oversold level (30 or below) or a long-term moving average moving below a shorter-term MA.
In short trades, you profit when the market goes down. When you enter a short position, you technically take the "sell" side of a trade. In other words, you enter the position by selling. Therefore, when it is time to close the trade, you will exit the position by taking the buy side of the trade. In essence, you exit by buying.
Exit buy signals may include the RSI reaching an oversold level (30 or below) or a long-term moving average moving below a shorter-term MA.
The ATR provides a picture of market volatility. It helps you define the potential downside in the market and allows you to choose a good position for your stop-loss order.
You can also use indicators that measure the normal price range for an asset. For example, if you enter a trade using Bollinger Bands and the market closes below the lower band, you may consider it a signal to exit the trade for a loss. Support and resistance levels may also provide lines to place your stop-loss orders or manually exit the trade for a loss.
You can also use indicators that measure the normal price range for an asset. For example, if you enter a trade using Bollinger Bands and the market closes below the lower band, you may consider it a signal to exit the trade for a loss. Support and resistance levels may also provide lines to place your stop-loss orders or manually exit the trade for a loss.