The European Union has published new regulations applying to retail Forex, CFD, and the few remaining binary options brokerages in its territory. If you have an account with one such brokerage, the regulations will affect you when they come into force during the late spring and summer. This article will outline how the new regulations will impact your bottom line.
Details of the New ESMA Regulations
In March 2018, the European Securities and Markets Authority (ESMA), the financial regulator and supervisor of the European Union, announced new regulations concerning the provision of contracts for differences (CFDs) and binary options to retail investors. It is unclear exactly when the regulations will come into force, but some time in May or June 2018 looks to be the most likely date, and Forex and CFD brokerages located within the European Union (including the United Kingdom, for the time being) will be forced to comply. The regulations will need to be renewed by ESMA every three months to remain in force over the long term.
The regulation concerning binary options is very simple: they may not be sold. In simple terms, this is the end of binary options as a product sold from within the European Union.
The regulations concerning CFDs are more complex but still relatively straightforward. Firstly, there is some confusion as to what exactly is a CFD, with many traders thinking that spot Forex is not considered a CFD and will therefore be exempt from the new regulations. They are wrong: spot Forex is technically defined as a CFD. In fact, every asset you see available for trading at Forex / CFD brokers will most likely be subject to the new regulations.
The new regulations will implement the following changes for retail client accounts (more on who is a retail client; later).
-
The maximum leverage which can be offered will be 30 to 1. That will apply to major currency pairs such as EUR/USD, GBP/USD, USD/JPY, etc.
-
Other currency pairs, major equity indices, and gold will be subject to a maximum leverage of 20 to 1.
-
Individual equities cannot be offered with leverage greater than 5 to 1.
-
Cryptocurrencies are subject to a maximum leverage of 2 to 1.
-
Brokers will be required to provide negative balance protection, meaning it will be impossible to lose more money than you deposit.
-
Brokers will be required to close a clients open positions when the account equity reaches 50% of the required minimum margin by all open positions. This ;margin call; provision can be tricky to understand, so will be explained in more detail later.
-
Bonuses or any other form of trading incentives may not be offered.
-
Brokers will be required to display a standardized risk warning which will include the percentage of their clients who lose money over a defined period.
Understanding the ;Margin Call; Regulation
The best way to understand the 50% margin call provision is to use an example. Imagine a client opens an account with a Forex broker, depositing ;100 in total. The client opens a short trade in EUR/USD, by going short one mini-lot (one tenth of a full lot). One full lot of EUR/USD is worth ;10,000, meaning one mini-lot is worth ;1,000. To find out the minimum margin required to support that trade, we divide the size of the trade (;1,000) by 30, which comes to ;33.33. This is the minimum required margin to maintain the trade. Half of that amount is ;16.67. Now assume the trade goes against the client, with the price of EUR/USD rising above the entry price. As soon as the price rises far enough to produce a floating loss of ;83.33 (;100 - ;16.67), the broker must close the trade out, even if the trade has no stop loss or has not yet reached the stop loss. In theory, this means that a client;s account can never reach zero. Examples involving multiple open trades will be more complex, but will operate according to the same principles.
What Will This Mean for Traders?
The regulations will only apply to ;retail clients;, so you might try to apply to be classed as a professional trader. To get a broker to classify you as anything other than a retail client, you will have to show you have financial qualifications, a large amount of liquid assets, plenty of experience trading, and usually that you also trade frequently. Most traders will be unable to qualify, although it is worth noting that one London-based brokerage, IG Group, has stated that their proportion of clients now classified as recently increased from 5% to 15% of their total customers.
The major impact these regulations will have on traders is simple ndash; the maximum trade size they can possibly make at brokers regulated in the European Union will shrink. Many will say that the maximum leverage limits still offer far more than any trader could need, and I agree. I am wary of leverage and I hate to see anyone using leverage greater than 3 to 1 for Forex under any conditions, or any leverage at all for stocks and cryptocurrencies. Commodities can also fluctuate wildly in value. Too many people forget that the biggest danger in leverage is not overly large position sizing, it is that a ldquo;black swan rdquo; event such as the CHF flash crash of 2015 could happen and wipe out your account through huge price slippage. However, there is another factor that is widely forgotten: why assume that a trader rsquo;s account at one Forex broker is all the money they have in the world? For example, a trader might have $10,000 in the bank. If they deposit $1,000 at a broker offering maximum leverage of 300 to 1, they can trade up to $300,000. At a leverage limit of 30 to 1, that trader will have to deposit their entire $10,000 fund to trade at the same size. In a real sense, that trader might now have to take on more risk to operate in the same way, because if the broker goes bust, while beforehand they might lose $1,000 now they could lose $10,000! Even without negative balance protection, that broker would still have to come after them to try to get an extra $9,000 which they theoretically risk. Yet we saw after the CHF crash that brokers don rsquo;t come after every single client whose losses exceeded their deposit, due to legal costs and reputational issues. This shows that although the stated purpose of the regulation is to protect traders from excessive losses, the story is not as simple as you may think.
Beyond having to deposit more margin, and automatic margin calls, the other major change for traders will be that they will enjoy negative balance protection. This is a positive development which hopefully will make brokerages focus more heavily on the risks they are taking with their business model in the market. At the same time, a possible side effect of the new regulation is the potential increase in average deposits, leading to brokerages being more stable and better capitalized with client funds. Two final notes: brokerages will have to report on their websites the percentages of clients who are losing and making money, although the period over which the statistics must refer to is currently not clear. This will help to shed light on the debate over what percentage of retail traders are profitable, although some brokerages have already released what they claim to be accurate statistics showing that clients with larger account sizes tend to perform better as traders. Additionally, bonuses and promotions will be banned. I welcome this, as not only do they trivialize the serious business of trading, they are almost always a trick offering the illusion of free money whilst preventing traders from withdrawing any profits until a large number of trades are made (read the fine print the next time you squo;).
What If Yoursquo;re Not Happy Remaining in the EU?
Traders with accounts at affected brokers who cannot obtain professional status classification and feel they really need higher leverage than the ESMA limits outlined above might look for a solution by opening accounts with brokers outside the European Union. The most obvious destination would be Australia or New Zealand, where it will still be possible to find reasonably well-regulated Forex brokerages offering leverage in the range of 400 to 1. A recent development that is not talked about much is the growing difficulty of transferring funds to and from Forex brokerages in less tightly regulated jurisdictions. You might decide to open an account with a brokerage in Vanuatu, but you may find that a bank within the European Union might just refuse to send your money there for a deposit. This means that going far offshore, depending upon where you live, may not be a feasible option. In any case, the new regule impossible to live with, and overall there is a compelling case that they are a net benefit to any trader, so why migrate?
Forex Trade Exit Strategies | Trading Forex
Many traders find that the hardest thing about trading Forex successfully is deciding when to close a trade. This is known as trade exit strategy. It is probably the most challenging and frustrating part of trading, and an area that tends to be overlooked in much Forex education. In this article I am going to explain why deciding how to close trades is so challenging, and then outlines some useful methods you can experiment with.
Why are Trade Exits so Difficult?
There are two main reasons why trade exit strategies are so difficult.The first reason is because many people think of them as the same as trade entries, just in reverse. The logic here is that a good long entry is the same as a good exit from a short trade. This is not really true, because we are usually looking for different things in our trade entries than we are in our exit.
For example, let’s say you have entered a trade because of a candlestick formation that you believe have some predictive power. The entry is successful, and the price goes in your desired direction for the next five candles. You then see the same formation happen, but signaling a short entry. Is it correct to exit the trade now?
There is no right or wrong answer here that fits every trader, for the simple reason that you really have no idea whether the price will now reverse and hit your entry or stop loss, or will instead pull back a little before continuing in your desired direction by another two thousand pips.
The answer as to what is right for you depends upon whether you are aiming for profit from short-term movements or longer-term moves, or both.
The answer as to what is right for you depends upon whether you are aiming for profit from short-term movements or longer-term moves, or both. You have to answer this question yourself before you know what exit strategy is right for you. If you think you can win 60% of your trades and compound your risk to make a great return, it makes sense to be ready to take profits quickly. If you prefer the statistically easier but psychologically more challenging goal of winning only a few of your trades but making big profits from those winners, it makes more sense to be very patient before exiting trades. Of course, you can combine both outlooks, and look to take partial profits early and leave the remainder on the table hoping for a big winner.
Now let’s turn to some good take profit and stop loss methods you can apply. These are all the methods you really need to worry about.
Fixed Reward to Risk Exit Targets
With this method, the distance from the trade entry to the stop loss represents 1 unit of risk. Here you set a take profit based upon a multiple of that until. For example if you want 2:1, and your stop loss is 100 pips, you set a profit target of 200 pips.Advantages: it is easy and can remove stress. If the pair is trending you can aim for a high ratio. You can also have several targets. If you are using a decent entry method and trading the hot currency pairs, and you use fairly high ratios of at least 3:1, you are giving yourself a good chance to achieve a profit.
Disadvantages: this method can be too rigid, as it takes no notice of how the market performs after entry. You might miss a target by just a few pips and end up losing the trade.
Time-Based Exits
This trade exit strategy is often overlooked. You simply decide you will exit any trade still open after a certain period of time. Back tests have shown this method to be surprisingly profitable. It has the same advantages and disadvantages of the previous method outlined above.Reward to Risk & Time Combination Exit
You could combine the two methods discussed above by deciding for example to exit a trade at a particular future point in time if the reward target has reached at least a certain minimum.Trailing Stop Loss
By trailing stop loss I mean either a real trailing stop loss which is set at a certain proportion or pip amount, or any method that moves up the stop so you exit ultimately by being stopped out. Of these methods, either moving up the stop to be just below recent swing lows or chandelier trailing stops tend to get the best results.These methods have the advantage of ensuring exits are based upon how the market performs. If you get a really strong move, these methods keep you in the trade for longer and help to maximize profit. The major disadvantage of these methods is that they might give up too much profit, especially if used incorrectly.
Support & Resistance
You could pick profit targets in advance based upon key strong support and resistance levels that you identify on longer-term charts, and trade targets at these levels. The disadvantage with this approach is that these levels can be very unpredictable and whether they hold or not depends a lot upon what is happening with market sentiment and news. A better approach is to know where these levels are, and keep them in mind for areas where it might be wise to exit if the price starts to turn around.Trend Line Break
If your trade is in the direction of a clearly defined trend in which an obvious and unambiguous trend line can be drawn, a clear break of the trend line could be a good exit signal.Double Top or Bottom
A more advanced trade exit strategy that takes practice to master but which also tends to get good results while giving up relatively little profit, is to wait for a major high to be made (in a long trade), followed by a pullback, and then a failed attempt to break that high. This requires good judgement, but can be a great way of getting out of a trade with as much profit as possible.The hardest part of this method is to know how to call the major highs and lows, and the failed retests. As a general rule, the longer the price takes to fail, the more decisive the failure is.
There are three types of double top or bottom:
- Classic, where the tops are roughly equal.
- Lower, where in a series of highs the first lower high is made, or the first higher low in a series of lows.
- 2b Breakout, where a slightly higher price is actually made which then fails quickly.
Long-Term Technical Analysis
If you are making trade entries on shorter time frames, you might decide to be more optimistic and let winning trades run for longer based currencies that are trending strongly over the previous few months.Fundamental Analysis
Fundamental analysis is not very good at telling you how to trade, but it can be useful in telling you which currency pairs might be more likely to move by many hundreds or even a few thousand pips over the coming weeks or months. Look not only at economic data but most importantly what the central banks in question are saying in their monthly statements, regarding whether they are seeing tighter or looser monetary policies as likely. Interest rates also have a small bearing, in that currencies with higher interest rates are slightly more likely to rise over the coming weeks than currencies with relatively low rates.Source
Forex Trade Exit Strategies | Trading Forex
Many traders find that the hardest thing about trading Forex successfully is deciding when to close a trade. This is known as trade exit strategy. It is probably the most challenging and frustrating part of trading, and an area that tends to be overlooked in much Forex education. In this article I am going to explain why deciding how to close trades is so challenging, and then outlines some useful methods you can experiment with.
Why are Trade Exits so Difficult?
There are two main reasons why trade exit strategies are so difficult.The first reason is because many people think of them as the same as trade entries, just in reverse. The logic here is that a good long entry is the same as a good exit from a short trade. This is not really true, because we are usually looking for different things in our trade entries than we are in our exit.
For example, let’s say you have entered a trade because of a candlestick formation that you believe have some predictive power. The entry is successful, and the price goes in your desired direction for the next five candles. You then see the same formation happen, but signaling a short entry. Is it correct to exit the trade now?
There is no right or wrong answer here that fits every trader, for the simple reason that you really have no idea whether the price will now reverse and hit your entry or stop loss, or will instead pull back a little before continuing in your desired direction by another two thousand pips.
The answer as to what is right for you depends upon whether you are aiming for profit from short-term movements or longer-term moves, or both.
The answer as to what is right for you depends upon whether you are aiming for profit from short-term movements or longer-term moves, or both. You have to answer this question yourself before you know what exit strategy is right for you. If you think you can win 60% of your trades and compound your risk to make a great return, it makes sense to be ready to take profits quickly. If you prefer the statistically easier but psychologically more challenging goal of winning only a few of your trades but making big profits from those winners, it makes more sense to be very patient before exiting trades. Of course, you can combine both outlooks, and look to take partial profits early and leave the remainder on the table hoping for a big winner.
Now let’s turn to some good take profit and stop loss methods you can apply. These are all the methods you really need to worry about.
Fixed Reward to Risk Exit Targets
With this method, the distance from the trade entry to the stop loss represents 1 unit of risk. Here you set a take profit based upon a multiple of that until. For example if you want 2:1, and your stop loss is 100 pips, you set a profit target of 200 pips.Advantages: it is easy and can remove stress. If the pair is trending you can aim for a high ratio. You can also have several targets. If you are using a decent entry method and trading the hot currency pairs, and you use fairly high ratios of at least 3:1, you are giving yourself a good chance to achieve a profit.
Disadvantages: this method can be too rigid, as it takes no notice of how the market performs after entry. You might miss a target by just a few pips and end up losing the trade.
Time-Based Exits
This trade exit strategy is often overlooked. You simply decide you will exit any trade still open after a certain period of time. Back tests have shown this method to be surprisingly profitable. It has the same advantages and disadvantages of the previous method outlined above.Reward to Risk & Time Combination Exit
You could combine the two methods discussed above by deciding for example to exit a trade at a particular future point in time if the reward target has reached at least a certain minimum.Trailing Stop Loss
By trailing stop loss I mean either a real trailing stop loss which is set at a certain proportion or pip amount, or any method that moves up the stop so you exit ultimately by being stopped out. Of these methods, either moving up the stop to be just below recent swing lows or chandelier trailing stops tend to get the best results.These methods have the advantage of ensuring exits are based upon how the market performs. If you get a really strong move, these methods keep you in the trade for longer and help to maximize profit. The major disadvantage of these methods is that they might give up too much profit, especially if used incorrectly.
Support & Resistance
You could pick profit targets in advance based upon key strong support and resistance levels that you identify on longer-term charts, and trade targets at these levels. The disadvantage with this approach is that these levels can be very unpredictable and whether they hold or not depends a lot upon what is happening with market sentiment and news. A better approach is to know where these levels are, and keep them in mind for areas where it might be wise to exit if the price starts to turn around.Trend Line Break
If your trade is in the direction of a clearly defined trend in which an obvious and unambiguous trend line can be drawn, a clear break of the trend line could be a good exit signal.Double Top or Bottom
A more advanced trade exit strategy that takes practice to master but which also tends to get good results while giving up relatively little profit, is to wait for a major high to be made (in a long trade), followed by a pullback, and then a failed attempt to break that high. This requires good judgement, but can be a great way of getting out of a trade with as much profit as possible.The hardest part of this method is to know how to call the major highs and lows, and the failed retests. As a general rule, the longer the price takes to fail, the more decisive the failure is.
There are three types of double top or bottom:
- Classic, where the tops are roughly equal.
- Lower, where in a series of highs the first lower high is made, or the first higher low in a series of lows.
- 2b Breakout, where a slightly higher price is actually made which then fails quickly.
Long-Term Technical Analysis
If you are making trade entries on shorter time frames, you might decide to be more optimistic and let winning trades run for longer based currencies that are trending strongly over the previous few months.Fundamental Analysis
Fundamental analysis is not very good at telling you how to trade, but it can be useful in telling you which currency pairs might be more likely to move by many hundreds or even a few thousand pips over the coming weeks or months. Look not only at economic data but most importantly what the central banks in question are saying in their monthly statements, regarding whether they are seeing tighter or looser monetary policies as likely. Interest rates also have a small bearing, in that currencies with higher interest rates are slightly more likely to rise over the coming weeks than currencies with relatively low rates.Source
Forex Trade Exit Strategies | Trading Forex
Many traders find that the hardest thing about trading Forex successfully is deciding when to close a trade. This is known as trade exit strategy. It is probably the most challenging and frustrating part of trading, and an area that tends to be overlooked in much Forex education. In this article I am going to explain why deciding how to close trades is so challenging, and then outlines some useful methods you can experiment with.
Why are Trade Exits so Difficult?
There are two main reasons why trade exit strategies are so difficult.The first reason is because many people think of them as the same as trade entries, just in reverse. The logic here is that a good long entry is the same as a good exit from a short trade. This is not really true, because we are usually looking for different things in our trade entries than we are in our exit.
For example, let’s say you have entered a trade because of a candlestick formation that you believe have some predictive power. The entry is successful, and the price goes in your desired direction for the next five candles. You then see the same formation happen, but signaling a short entry. Is it correct to exit the trade now?
There is no right or wrong answer here that fits every trader, for the simple reason that you really have no idea whether the price will now reverse and hit your entry or stop loss, or will instead pull back a little before continuing in your desired direction by another two thousand pips.
The answer as to what is right for you depends upon whether you are aiming for profit from short-term movements or longer-term moves, or both.
The answer as to what is right for you depends upon whether you are aiming for profit from short-term movements or longer-term moves, or both. You have to answer this question yourself before you know what exit strategy is right for you. If you think you can win 60% of your trades and compound your risk to make a great return, it makes sense to be ready to take profits quickly. If you prefer the statistically easier but psychologically more challenging goal of winning only a few of your trades but making big profits from those winners, it makes more sense to be very patient before exiting trades. Of course, you can combine both outlooks, and look to take partial profits early and leave the remainder on the table hoping for a big winner.
Now let’s turn to some good take profit and stop loss methods you can apply. These are all the methods you really need to worry about.
Fixed Reward to Risk Exit Targets
With this method, the distance from the trade entry to the stop loss represents 1 unit of risk. Here you set a take profit based upon a multiple of that until. For example if you want 2:1, and your stop loss is 100 pips, you set a profit target of 200 pips.Advantages: it is easy and can remove stress. If the pair is trending you can aim for a high ratio. You can also have several targets. If you are using a decent entry method and trading the hot currency pairs, and you use fairly high ratios of at least 3:1, you are giving yourself a good chance to achieve a profit.
Disadvantages: this method can be too rigid, as it takes no notice of how the market performs after entry. You might miss a target by just a few pips and end up losing the trade.
Time-Based Exits
This trade exit strategy is often overlooked. You simply decide you will exit any trade still open after a certain period of time. Back tests have shown this method to be surprisingly profitable. It has the same advantages and disadvantages of the previous method outlined above.Reward to Risk & Time Combination Exit
You could combine the two methods discussed above by deciding for example to exit a trade at a particular future point in time if the reward target has reached at least a certain minimum.Trailing Stop Loss
By trailing stop loss I mean either a real trailing stop loss which is set at a certain proportion or pip amount, or any method that moves up the stop so you exit ultimately by being stopped out. Of these methods, either moving up the stop to be just below recent swing lows or chandelier trailing stops tend to get the best results.These methods have the advantage of ensuring exits are based upon how the market performs. If you get a really strong move, these methods keep you in the trade for longer and help to maximize profit. The major disadvantage of these methods is that they might give up too much profit, especially if used incorrectly.
Support & Resistance
You could pick profit targets in advance based upon key strong support and resistance levels that you identify on longer-term charts, and trade targets at these levels. The disadvantage with this approach is that these levels can be very unpredictable and whether they hold or not depends a lot upon what is happening with market sentiment and news. A better approach is to know where these levels are, and keep them in mind for areas where it might be wise to exit if the price starts to turn around.Trend Line Break
If your trade is in the direction of a clearly defined trend in which an obvious and unambiguous trend line can be drawn, a clear break of the trend line could be a good exit signal.Double Top or Bottom
A more advanced trade exit strategy that takes practice to master but which also tends to get good results while giving up relatively little profit, is to wait for a major high to be made (in a long trade), followed by a pullback, and then a failed attempt to break that high. This requires good judgement, but can be a great way of getting out of a trade with as much profit as possible.The hardest part of this method is to know how to call the major highs and lows, and the failed retests. As a general rule, the longer the price takes to fail, the more decisive the failure is.
There are three types of double top or bottom:
- Classic, where the tops are roughly equal.
- Lower, where in a series of highs the first lower high is made, or the first higher low in a series of lows.
- 2b Breakout, where a slightly higher price is actually made which then fails quickly.
Long-Term Technical Analysis
If you are making trade entries on shorter time frames, you might decide to be more optimistic and let winning trades run for longer based currencies that are trending strongly over the previous few months.Fundamental Analysis
Fundamental analysis is not very good at telling you how to trade, but it can be useful in telling you which currency pairs might be more likely to move by many hundreds or even a few thousand pips over the coming weeks or months. Look not only at economic data but most importantly what the central banks in question are saying in their monthly statements, regarding whether they are seeing tighter or looser monetary policies as likely. Interest rates also have a small bearing, in that currencies with higher interest rates are slightly more likely to rise over the coming weeks than currencies with relatively low rates.Source
Forex Trade Exit Strategies | Trading Forex
Many traders find that the hardest thing about trading Forex successfully is deciding when to close a trade. This is known as trade exit strategy. It is probably the most challenging and frustrating part of trading, and an area that tends to be overlooked in much Forex education. In this article I am going to explain why deciding how to close trades is so challenging, and then outlines some useful methods you can experiment with.
Why are Trade Exits so Difficult?
There are two main reasons why trade exit strategies are so difficult.The first reason is because many people think of them as the same as trade entries, just in reverse. The logic here is that a good long entry is the same as a good exit from a short trade. This is not really true, because we are usually looking for different things in our trade entries than we are in our exit.
For example, let’s say you have entered a trade because of a candlestick formation that you believe have some predictive power. The entry is successful, and the price goes in your desired direction for the next five candles. You then see the same formation happen, but signaling a short entry. Is it correct to exit the trade now?
There is no right or wrong answer here that fits every trader, for the simple reason that you really have no idea whether the price will now reverse and hit your entry or stop loss, or will instead pull back a little before continuing in your desired direction by another two thousand pips.
The answer as to what is right for you depends upon whether you are aiming for profit from short-term movements or longer-term moves, or both.
The answer as to what is right for you depends upon whether you are aiming for profit from short-term movements or longer-term moves, or both. You have to answer this question yourself before you know what exit strategy is right for you. If you think you can win 60% of your trades and compound your risk to make a great return, it makes sense to be ready to take profits quickly. If you prefer the statistically easier but psychologically more challenging goal of winning only a few of your trades but making big profits from those winners, it makes more sense to be very patient before exiting trades. Of course, you can combine both outlooks, and look to take partial profits early and leave the remainder on the table hoping for a big winner.
Now let’s turn to some good take profit and stop loss methods you can apply. These are all the methods you really need to worry about.
Fixed Reward to Risk Exit Targets
With this method, the distance from the trade entry to the stop loss represents 1 unit of risk. Here you set a take profit based upon a multiple of that until. For example if you want 2:1, and your stop loss is 100 pips, you set a profit target of 200 pips.Advantages: it is easy and can remove stress. If the pair is trending you can aim for a high ratio. You can also have several targets. If you are using a decent entry method and trading the hot currency pairs, and you use fairly high ratios of at least 3:1, you are giving yourself a good chance to achieve a profit.
Disadvantages: this method can be too rigid, as it takes no notice of how the market performs after entry. You might miss a target by just a few pips and end up losing the trade.
Time-Based Exits
This trade exit strategy is often overlooked. You simply decide you will exit any trade still open after a certain period of time. Back tests have shown this method to be surprisingly profitable. It has the same advantages and disadvantages of the previous method outlined above.Reward to Risk & Time Combination Exit
You could combine the two methods discussed above by deciding for example to exit a trade at a particular future point in time if the reward target has reached at least a certain minimum.Trailing Stop Loss
By trailing stop loss I mean either a real trailing stop loss which is set at a certain proportion or pip amount, or any method that moves up the stop so you exit ultimately by being stopped out. Of these methods, either moving up the stop to be just below recent swing lows or chandelier trailing stops tend to get the best results.These methods have the advantage of ensuring exits are based upon how the market performs. If you get a really strong move, these methods keep you in the trade for longer and help to maximize profit. The major disadvantage of these methods is that they might give up too much profit, especially if used incorrectly.
Support & Resistance
You could pick profit targets in advance based upon key strong support and resistance levels that you identify on longer-term charts, and trade targets at these levels. The disadvantage with this approach is that these levels can be very unpredictable and whether they hold or not depends a lot upon what is happening with market sentiment and news. A better approach is to know where these levels are, and keep them in mind for areas where it might be wise to exit if the price starts to turn around.Trend Line Break
If your trade is in the direction of a clearly defined trend in which an obvious and unambiguous trend line can be drawn, a clear break of the trend line could be a good exit signal.Double Top or Bottom
A more advanced trade exit strategy that takes practice to master but which also tends to get good results while giving up relatively little profit, is to wait for a major high to be made (in a long trade), followed by a pullback, and then a failed attempt to break that high. This requires good judgement, but can be a great way of getting out of a trade with as much profit as possible.The hardest part of this method is to know how to call the major highs and lows, and the failed retests. As a general rule, the longer the price takes to fail, the more decisive the failure is.
There are three types of double top or bottom:
- Classic, where the tops are roughly equal.
- Lower, where in a series of highs the first lower high is made, or the first higher low in a series of lows.
- 2b Breakout, where a slightly higher price is actually made which then fails quickly.
Long-Term Technical Analysis
If you are making trade entries on shorter time frames, you might decide to be more optimistic and let winning trades run for longer based currencies that are trending strongly over the previous few months.Fundamental Analysis
Fundamental analysis is not very good at telling you how to trade, but it can be useful in telling you which currency pairs might be more likely to move by many hundreds or even a few thousand pips over the coming weeks or months. Look not only at economic data but most importantly what the central banks in question are saying in their monthly statements, regarding whether they are seeing tighter or looser monetary policies as likely. Interest rates also have a small bearing, in that currencies with higher interest rates are slightly more likely to rise over the coming weeks than currencies with relatively low rates.Source
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