While a Forex trading strategy will play a key part in your trading performance, that strategy will be almost pointless if you haven’t identified the right entry and exit points for your trade. At the end of the day, where you buy and sell your currency assets will define your success.
But how can you identify the best entry and exit points for your Forex trading style and strategy?
In this guide, we will outline exactly what entry and exit strategies are in Forex trading, and then take you through how to identify entry and exit points for your trades. This will cover when the best time to enter, and exit, a trade might be for you. So, let’s start with some basics.
How Does Forex Trading Work?
Unlike stock trading, where a stock price is set by the stock exchange, in Forex trading, currencies are bought and sold freely between two parties. This means that there is no centralised exchange setting currency prices.
The price of a currency pair is set by the market based on supply and demand. When more Forex Traders want to buy a currency than sell it, the price will go up. When more people want to sell it than buy it, the price will go down. This is what’s known as a floating exchange rate and is how most major currency pairs are traded.
Currency prices are constantly changing as traders buy and sell currency pairs. These changes in price create what are known as pips. For example, if the EUR/USD currency pair moves from 1.1250 to 1.1251, that is a one pip move. If the currency pair moves from 1.1250 to 1.1350, that is a 100 pip move.
What are Entry and Exit Points in Forex?
An entry point is the price level at which you open a trade. An exit point is the price level at which you close a trade. It’s that simple – sort of.
Your entry and exit points will define your profits or losses in a trade. If you buy a currency pair at 1.2500 and it rises to 1.2600 before you exit the trade, you will have made a profit of 100 pips. If it falls to 1.2400 before you exit the trade, you will have made a loss of 100 pips.
Of course, there is more to consider than simply buying or selling at a certain price. You also need to consider things like stop-losses and take-profits. We will cover these in more detail later on.
For now, just remember that entry and exit points are the most important part of your Forex trading strategy. If you don’t get these right, your strategy could be worthless.
When Should I Enter and Exit a Trade?
When’s the best time to enter a trade?
If we knew the exact answer to that question, Forex trading would become a lot easier. The best time to enter a trade tends to be at the bottom of a trend, but will ultimately depend on a few different factors, such as:
- Market fluctuations
- Trading psychology, plan & style
- Technical analysis
- Current and historical trend data
Unfortunately, there are a couple of traps we can fall into when entering a trade in the Forex market. One of them is holding off too long before entering a trade. For example, you may estimate that the value of a currency pair will increase, but if you hold off on entering the trade too long, you could limit your potential profits if the market does appreciate.
Similarly, if you rush to enter into trade too early, you may miss the opportunity to get that currency at a better price. So it’s vital that you do your research before deciding the best time to enter a trade and learn how to identify your entry points effectively.
When’s the best time to exit a trade?
This will largely depend on your trading style, strategy, and the investment objectives you have set. For example, if you are a day trader, you may want to exit your trade before the end of the day. If you are a swing trader, you may hold your trade for days or weeks before exiting.
There is no one-size-fits-all answer to this question. You will need to experiment and figure out what works best for you. Some factors that could affect when the best time to exit your trade is include:
- Your profit target
- Your risk aversion
- Market risks and fluctuations
- Changes in currency strength
- Technical analysis.
The most important thing is that you have a plan for exiting your trade before you even enter it. This will help to take the emotion out of the equation and ensure that you exit your trade at the right time.
How To Identify Entry and Exit Points in Forex
How to identify Forex entry points:
- Start with solid technical analysis and a plan of action
To identify an entry point in the Forex market, you need to start with some solid technical analysis and a plan of action including potential entry and exit points based on your findings.
When trading Forex pairs, you have to understand what moves the currencies. Analyse the market to identify trends. Research, learn and understand what the relevant correlations and factors are that affect the market.
What’s going on in the world? How is this impacting the Forex market today? After you’ve learnt about what forces are moving the Forex pair, you will have a better idea of where (and when) to place your trades.
Some factors that could influence a Forex pair could include:
- Geopolitical factors such as war, political unease or commodity supply.
- Natural disasters
- Interest rate changes
- Natural supply and demand.
By being aware of these factors, you can be adequately prepared to enter trades when the market time is right.
- Enter trades for specific analytical reasons
You always want to enter trades for specific analytical reasons, for example if you’ve identified a clear trend during your technical analysis. This helps you to avoid emotional trading and things like trading FOMO which can be disastrous for your portfolio and profit margins.
Emotional trading is when you enter a trade based on your feelings or instincts rather than actual market analysis. This can often lead to bad decisions and missed opportunities.
Before entering any trade, always ask yourself:
- What’s the rationale behind this trade?
- Does my technical analysis and trading strategy support this trade?
- Does my plan have defined entry and exit points?
If you can’t answer these questions with confidence, then you shouldn’t be entering that trade. When you have a clear plan and reason for entering a trade, it becomes much easier to stick to your guns and know when to exit the trade, even if things are going against you.
- Remember that trend lines are your friend
They can provide fast insight into possible entry points by connecting a series of higher highs or a series of lower lows, making them extremely easy to use.
By providing a clear indicator of uptrends and downtrends (or support and resistance levels) for the financial markets, the right entry point can be determined based on the current value’s relation to these trends. As the value reaches the trendline, it’s a good indicator that it could be time to enter a trade.
Using trendlines can also help to indicate the best exit point for your trade. As the value starts to move away from the trendline, it’s a good sign that the market is losing momentum and you may want to consider closing your position. Support and resistance levels can also be used in a similar way to identify possible entry and exit points.
- Use limit orders for best pricing
Limit orders ensure that you can enter trades at specific, and the best possible, price targets. For example:
Say EUR/USD is trading at 1.1225 and you believe the price will dip slightly before trending back up. You set a trade order at 1.1200 – the point you expect the price to drop to before appreciating – to ensure you will enter the trade nearest the bottom of the trend.
By setting up an order to enter the trade at the bottom of the trend, you can ensure that you’re entering the trade at the best possible price. This can be an extremely useful tool for any Forex trader, especially if you tend to rush into your trades without considering upcoming opportunities with better entry price potential.
- Use technical indicators to identify entry points
Technical indicators provide you with essential information about the Forex market and currency pairs. They are key to understanding entry points and exit points, supply and demand, possible swings in trends and other key statistical data.
Using one or more specific trading indicators, you can create trading signals for yourself that define exactly when to enter or exit the market. If you really want to improve your chances of success as a Forex trader, we highly recommend learning about key indicators, such as:
- Bollinger bands
- Moving averages
- Fibonacci levels.
By understanding these technical indicators and how they show up in your chosen currency market, you can identify your entry points with much more accuracy.
How to identify Forex exit points:
- Keep your eyes on the market
When you’re in a trade, it’s important to continually monitor the market for signs that the tide is turning against your position. By keeping an eye on things like support and resistance levels, trendlines and Bollinger bands, you can get a good idea of when the market is about to make a move.
In addition, when it comes to Forex exit points, it’s important to keep an eye on your technical indicators. If you see one of your key indicators starting to trend in the opposite direction of your position, it’s a good sign that you may want to start thinking about closing your trade.
- Use take-profit limit orders
By using take-profit orders, you can take your profit from a trade at a pre-defined exit point, meaning you never stay in a trade too long. Using the EUR/USD example we mentioned above, if you set your trade order at 1.1200 and enter the trade towards the bottom of the trend, you could then set your take profit limit order at 1.1300. This would provide you with a 1% profit margin on this trade.
Alternatively, if you would like a higher profit margin, you can set your take-profit orders higher, for example at 10%. However, make sure your choices here are guided by technical analysis and market research, and not pure aspiration, as you can always set this too high and miss your chance for profit before market depreciation.
As such, a higher take-profit order comes with higher investment risk, so make sure to adjust your trading strategies accordingly.
As we mentioned before, a comprehensive understanding of technical analysis concepts and Forex strategies will help you to identify the specifics of your take-profit levels and where you should set them for each trade.
- Use stop-loss orders
Stop-loss orders are the flip-side of take profit orders in that they provide you with a way to cut your losses if the market starts to move against your position. For example, using the EUR/USD trade order from before, if you set your stop-loss at 1.1100, you would automatically exit your trade if the price dropped below this level, helping you to limit your losses.
Stop-loss strategies are an essential tool for any Forex trader as they provide you with a way to manage your risk and protect your capital. By using stop-loss orders, you can make sure that you never lose more money on a trade than you’re comfortable with.
Of course, where you set your stop-loss order is going to be determined by your own risk tolerance and trading strategy. A good rule of thumb is to set your stop-loss order at around 2% below the entry price of the trade.
Remember, the goal is to limit your losses, not eliminate them, so make sure your stop-loss levels are realistic.
- Remember you can change your stop-loss
If the market appreciates and you want to continue to hold your position but move your stop-loss into a more profitable position, you can always change your stop-loss order. You could consider using a trailing stop-loss as your exit strategy at this point to lock in your profits as the market moves.
A trailing stop-loss is an order that automatically adjusts to the changing market conditions. For example, if you had a long position on EUR/USD and the market started to move in your favour, you could set a trailing stop-loss at 10 pips below the current market price. This would automatically move your stop-loss up 10 pips as the market moves, and would protect any profits you’ve made.
Of course, you don’t have to wait for the market to start moving in your favour before you move your stop-loss order. You can always manually adjust your stop-loss to suit your trading strategy.
For example, if you want to take a higher risk approach, you could move your stop-loss further from your entry point. This would give you the potential for a higher profit margin but also increase your risk of losing money, as you’re less likely to be stopped out when the market moves against you.
Looking For a Funded, Educational Forex Trading Programme?
Develop your entry and exit strategies with the support of experienced traders, receive access to a $10K funded live account and access to a licensed trading psychologist with our Forex Trader Programme.
At Alphachain, all of our funded trader programmes offer you an immersive, practical education in Forex trading and access to a like-minded community of peers and professionals. Our aim is to help you become the best trader you can be.