I thought that was interesting. Not only did he have the beginning and upcoming years in mind but he also had an “exit strategy” in place as well too.

Well, as with a business, you need to have an exit strategy for every Forex trade too. Many trading systems out there mainly put the emphasis on the entry. (”You need to get in on this trade now!”) But it’s rare that a Forex site describes the exit strategy built into their trading system. But that’s a crucial element of your trade.

Let me explain why with an example.

The other day I saw the Forex account of one trader who started with US$10,000 as his initial balance. In just 30 days, he managed to turn that US$10,000 seed money into US$70,000…and then unfortunately, lost all his gains and closed out the month with US$5,000 (HALF his initial balance).

Can you believe it? He was up sevenfold on his money…and then lost 50% of his initial balance by the end of the month!

He obviously had a great initial strategy with profitable entry points, but he didn’t have an exit strategy to lock in those gains. This is actually pretty easy to do, if you’re not ready with an entry and exit strategy for each trade.
I want you to hang onto your profits when you earn them, so let’s talk strategy…

You Have to Play Both Offense and Defense!

For starters you really need two exit strategies.

You need one offensive and one defensive. Just like a good football team has to be able to play both sides of the game…well, you need to play both sides as a Forex trader.

You better not only know how to make profits (offensive) but also how to protect those profits (defensive).

So let’s talk about the defensive strategy first because it’s really the most important.

A defensive exit strategy is your stop. You place a stop-loss at the point where the market will prove you wrong in your trade. You can also place a stop-loss where you have risked the maximum amount of your account that you are willing to lose on that particular trade.

So one way to do this is to identify areas on the currency chart that show signs of support. Place a stop below that area. That way, if support is broken and a new downtrend emerges, you don’t ride it all the way down and give up your account balance in the process.

Your Stop-Loss Goes Under the Support Line!

However, another approach is not only to analyze this aspect but also to analyze the potential damage to the account percentage too.

So before you place the trade, look at your entry and your stop-loss price. How many pips is the difference between your entry and stop? (You can find this out by looking at any chart.) Once you know the difference in pips, multiply that number by the number of lots that you are considering investing in. How much does that equal in dollars? Ask yourself: Are you willing to risk that much?

If it’s over 1-5% of your account balance, I’d suggest investing in fewer lots.

That’s my best defensive strategy. Check tomorrow’s A-Letter to hear about playing offense.

Source: Why You Need an Exit Strategy for Every Trade

The first reason is because they simply don’t know that it’s part of investing successfully. Learning about stop-losses and risk management simply isn’t as sexy as learning about how to make triple-digit gains. So the subject is often avoided.

Second, it’s a matter of emotions. You see no one in the world – not me, not you, or anybody else – enjoys selling stocks at a loss. It’s a pain that nobody wants to inflict on themselves. So as long as they don’t sell at a loss, they never end up ‘inflicting’ the pain.

Then there’s the prospect of selling at a loss and then looking at the stock a few weeks later, only to find that you could’ve sold it for a gain. Now, the investor might feel embarrassed or foolish. Nobody wants that. So emotionally, it makes sense why a lot of investors don’t follow through with an exit strategy. But logically, an exit strategy is IMPERATIVE to making money in the stock market.

If people didn’t take their losses, then they’d never free up capital to pursue better opportunities. Heck, if people didn’t take their losses they’d eventually have no capital at all.

This is a situation you don’t want to put yourself into. So before you get into a trade, MAKE SURE to have an exit strategy planned. And you should do this for every single trade.

If that means selling your position once you lose ten or fifteen percent, then follow through with it! If your exit strategy is simply to sell if the fundamentals of your buy change, then make sure to follow through with it!

Either way, just remember to ALWAYS have an exit strategy before you invest. And more importantly, FOLLOW THROUGH WITH IT!

Good trading,

Charles