Forex Trading: The Importance of Exit and Entry Strategies

Forex trading is an activity that requires a great deal of intellectual energy, intense commitment, and the application of a remarkable set of skills. Accusations that view online trading - and especially Forex - as a variant of gambling are simply biased. The demonstration of this, i.e., the necessity of a "technical" approach, is given by the importance that exit and entry strategies assume for traders. Both define the parameters of trading operations, establishing the beginning and end of their activity. They fall, in fact, within the more complex context of money management and risk management. Both are important, there's no doubt about that, but... Should one focus on one of the two in particular? It is possible to answer by evaluating the advantages of each strategy.

The Exit Strategy in Forex Trading

The exit strategy simply means identifying the price at which the position is closed once reached. This closure can be done manually, i.e., by the trader himself based on what was previously decided, or automatically. In this case, we are talking about stop loss and take profit, and it is necessary to use a robot software. In any case, the exit strategy is important, and even necessary, to limit losses. It can happen that a trade goes wrong and generates losses. The trader can keep the position open because he expects a trend reversal. Establishing the price in advance, however, perhaps precisely with a stop loss, allows the trader himself to "exit" before things worsen irreversibly (or what he deems irreversible). The main issue, and the true element of effectiveness of the exit strategy, is that abandoning the position occurs based on a decision made previously, on programming, on analytical work carried out calmly and thoughtfully, not haphazardly and during a market session. A similar reasoning can be made in reference to the second great advantage of the exit strategy: protecting profits. When a trade generates profit, there is a tendency to leave it open in order to continue acquiring profit. The further one goes, however, the higher the risk of encountering a trend reversal, which will inevitably erode the hard-earned gains. Thanks to the exit strategy, however, the trader knows in advance when to leave and take home the result. In this case, we are talking about take profit. Obviously, it is the trader himself who decides - preventively, when developing the strategy - the ceiling, and therefore the objective. From these two advantages, another derives, perhaps the most important: escaping emotional involvement. Emotion, strange but true, is the trader's greatest enemy. It deprives him of the clarity necessary to make correct choices, it blocks him (when it is negative), it makes him reckless (when it is positive). In short, thanks to the exit strategy, which is obviously drawn up well in advance of the opening of the trade, the investor can afford not to decide when he is not able to do so. The boundaries of the operation are decided beforehand, they are the result of analysis and not of contingencies. Also because, as is easily understandable, contingencies in Forex trading (and in general when money is at stake) produce strong stress. Finally, an advantage that is perhaps less concrete but no less useful has to do with discipline. The drafting of the exit strategy, and above all the respect for it, contributes to increasing the sense of discipline. This concept belongs to all successful traders. It is thanks to a rigorous and one might even say sober approach that the investor manages to systematically achieve his goals. Discipline towards oneself first of all, in a context in which consistency with one's action plan must be preserved at all costs.

The Entry Strategy in Forex Trading

If the exit strategy is important, so is the entry strategy. After all, they are two sides of the same coin, two functional ways to draw the boundaries within which it is possible to operate or a trade has reason to exist. Specifically, the entry strategy suggests to the trader the exact moment in which to open a position. The main advantage is that, especially in a context of automatic Forex trading, it allows to seize all the opportunities that the market offers, regardless of the time or the actual availability of the trader. If you transmit the entry strategy to the robot, an entry level, you can invest even without being present, and thus take advantage of opportunities that would otherwise have been lost. The concept of "opportunities" is important: Forex, in fact, is one of the few markets open 24 hours a day, so... Why not take advantage of this characteristic? In fact, it is precisely during the most inconvenient hours that the most profitable deals can be executed (for example, moments of post-election result volatility). Another advantage that derives from the use of the entry strategy consists in its adaptability to the intraday approach. For "long-term" trades, which therefore span a wide horizon, it is not necessary to impose a strategy that, in any case, proposes automatisms: the trader has all the time to reason about the ongoing trade. The intraday approach, and specifically the "fast" one (scalping), requires greater attention and, above all, the need to make decisions quickly, to decide immediately whether to enter the market or not. The entry strategy relieves the trader from the burden of deciding on the spot. Using and above all respecting the entry strategy means forcing oneself to develop and put into practice a more technical and scientific approach to Forex trading. There is no entry strategy (or exit strategy for that matter) without technical analysis work behind it. Binding oneself to the need to practice technical analysis can only be positive: it frees investment activities from the drift of gambling, increases understanding of the market, and allows traders to have an overall vision that will be especially useful when they find themselves stepping out of the box. Ultimately, it is possible to state that the entry strategy and the exit strategy are both important, and practically to the same extent. They are two sides of the same coin, two tools to achieve the same fusion goal: defining the boundaries of trading and protecting capital. They are a resource of money management, a weapon against risk. Of course, one can argue whether it is worse to lose capital rather than lose an opportunity but, in this case, we are in the field of personal opinions. It is not an opinion but a fact that all traders, especially those who intend to try their hand at automatic Forex trading, must learn to draft exit and entry strategies.