One of the most challenging decisions that Forex traders are
faced with on a day to day basis is…knowing when to hold on to a trade
and when to close it.
This decision is usually the one that gives traders the most difficulty
and frustration, and it is something that you must learn to effectively
deal with if you want to make consistent money in the forex market.
Trade management is often the area that gives forex traders the most
trouble; it is relatively easy to get into a profitable trade but it is
much harder to manage that profitable trade in such a way that it
produces an outcome you are satisfied with.
This article will only
focus on one area of the process of trade management; knowing when to
hold on to a winning trade in order to let your profits run, and knowing
when to close a winning trade and take your money. Pardon the cliché,
but as the Kenny Rogers song goes, “You’ve got to know when to hold em’,
and know when to fold em”…(If you never heard the song click here: Kenny Rogers)
How to manage a trade with a big open profit…
While
there are certainly worse problems to have in the world, trying to
figure out what you should do with a trade that is deep in profit can
actually be quite puzzling for many forex traders. The problem that
traders in this situation face is whether they should hold their trade
for an even larger gain that may or may not materialize, or close the
trade out and walk away with a very nice profit.
What this
decision really comes down to is one of logic vs. emotion. Take a look
at the technical picture of the chart that you are trading while
completely disregarding how much money you are up or how you feel. When
you look at the chart from this perspective think about how big the
recent move has been that you have traded, how much has price moved
compared to the ATR (average true range)? Do you really believe there is
a logical technical reason that such a large move will continue on in
your direction before reversing, or are you just being greedy? Remember
that just because a trade is heavily in your favor does not mean you
should necessarily keep it open. If you are in a trade that is up more
than 3 or 4 times your risk, you should really stop to ask yourself, “Do
I really believe this trade will keep going up or down in a straight
line or is it more likely to experience a correction?” It usually makes
more sense to lock in most of your profit or close a trade out that is
deep in profit, because if there is one thing we can all agree on about
the forex market it’s that it ebbs and flows and doesn’t travel in a
straight line for very long except on rare times of economic volatility.
Here is an example of the point above illustrated in the daily GBPJPY daily chart from mid – 2010…
Another example….
How to manage a winning trade in trending markets…
Trending
markets can increase the odds of a trade moving in your favor and as a
result the chances of being able to let your profits run into bigger
gains. One good way to tell whether or not you should try and let your
profits run when a market is trending is whether or not new highs (in an
uptrend) or new lows (in a downtrend) are being made on near daily
basis. If this is happening you can simply trail your stop loss along
the 8 day ema or slightly above / below the previous day’s high or low
and let the trade run in your favor until it reverses and hits your
stop.
Here is an example of the above point illustrated in the recent EURUSD bullish move on the daily chart…
How to manage a winning trade in the midst of opposing price action or support / resistance level…
Another factor you want to look for when trying to decide if you should hold your winning trade or fold it is whether or not there is an opposing price action signal or a nearby support or resistance level. A nearby opposing price action reversal signal or strong support or resistance level can be a good reason to close out a winning trade. Also, if there is a previous support or resistance level that has held strong in the past, you might want to use this level for a profit target, usually putting your target just in front of the level works better than trying to squeeze every last pip out by putting your target right at the level or slightly beyond it.
Just as we can use price action signals to enter into high probability trades, we can also use the opposite signal to exit a trade. How many times have you been in a pin bar trade and then after a day or two an opposing pin bar forms? In this case you might want to trail up your stop to just above the high or below the low of the opposing pin bar, depending on which direction you are trading. Opposing price action signals can be used to exit a profitable trade if they occur in the natural course of that trade, however, you should not wait or depend on such an opposing signal to exit a profitable trade, it is just something to be on the lookout for in case you are in a profitable trade.
Here is an example of the above point illustrated on the daily GBPJPY chart:
Another example…
How to manage a winning trade when reaffirming price action occurs…
One of the best signs that a particular trade is a good candidate to be held instead of folded is reaffirming price action. For example, if you are long the market and you get a bullish pin bar or consecutive bullish pin bars that form in the context of the uptrend you are trading you can be reassured by this price action because it “agrees” with the direction you are trading. This is essentially the opposite of the “opposing price action” rule that we discussed in the point above. This reaffirming price action can be a very good indicator that you should hold a winning trade instead of folding it. Learning to “read” a price chart in this discretionary manner is really what distinguishes the pros from the amateurs.
Here is an example of the above point illustrated on the AUDJPY daily chart…
Another example…
How to manage a winning trade in different market conditions…
Another factor to take into consideration when deciding whether to hold or fold your winning trade is the current state of the market. Is the market trending or consolidating, quiet or volatile? In a strong trend you will likely have a better chance to hold a trade for bigger gains, in a consolidating market you are probably better off using support and resistance levels and / or opposing price action signals to exit your trade. It is crucial that you consider what condition the market that you are trading is in before deciding whether or not to exit your trade.
Here are examples of managing a winning trade in a trending market on the daily USDJPY chart and an example of managing a winning trade in a consolidating market on the daily GBPJPY chart:
Don’t count your money when you’re sitting at the table…
When deciding whether to hold or fold your trade it is important that you look at your trade in terms of risk to reward instead of the amount of pips you are up. This is analogous to not counting your money when you’re sitting at the table; don’t count your pips when you are in a trade but instead calculate your risk to reward scenario. Before entering any trade it is very important to figure out how much reward you can reasonably make relative to the amount you are risking. As the trade progresses it is important to remember your pre-defined risk / reward scenario, you really don’t want to take anything less than this pre-defined risk / reward amount unless there is a logical reason to do so like one of the points we discussed above.
If in doubt…
If you find yourself in a profitable forex trade and you are unsure whether or not you should hold or fold it, the first thing you need to make sure you do is NOT let your emotion influence your exit decision as this is one of the most common and detrimental mistakes that forex traders make. If all else fails you can always refer back to this article and the points discussed above, go through them and see if any of them apply to the current trade you are in, you can think of this article as a sort of “check list” for what to do when you are in a winning trade.
The most important and useful thing that you can do when in a profitable trade is to stop and ask yourself, “should I stay in this trade or should I close it?” Have a logical think about it for more than a few minutes and remind yourself that you need to avoid an emotional exit at all costs. Refer back to the points above and ask yourself if any of them apply to you, make yourself a pros and cons list if you need to weigh the advantages of staying in the trade vs. the disadvantages. If after all of this you still cannot control yourself than you might need to seek additional help by reading some of our other forex articles or watch some forex videos.
Producing a satisfying outcome for profitable trades is one of the most difficult aspects of successful forex trading, use the information in this article and the logical-thinking part of your brain to decide how to exit your winning forex trades and you will be in a very good position to profit on a consistent basis in the markets.
