Regardless of your trading system or style, every trade you make must have some reason behind it. If there is no reason behind your trade, than it’s a pure and simple gamble. And if you gamble in forex, you will lose money in the long run (we will discuss why gambling is bad in forex in another post).
You have bought or sold something, now what?
Now there are only 2 ways for the currency price to go: either in your favour or against you.
What do you do if the currency price moves in your favour?
Naturally, you want to make as much money as possible but you also want to protect your profit. Therefore, there are 3 ways to make sure you make money on this trade:
1. Set a Target Price. A target price is usually some logical price level where there is a high probability for the price move to stall or reverse.
2. Use a Trailing stop. As the name suggests, you trail your stop order at some distance behind the current price in order to protect your gains. Once the price move reverses, your stop order is triggered and the position gets closed.
3. Opposite signal generated by your trading system. Sometimes you have an open position and your trading system generates a signal in the opposite direction. It’s time to exit the position or at least move your trailing stop order closer.
What do you do if the currency price moves against you?
If the currency price moves against you, there are also 2 way to close this position:
1. Stop Loss order.
2. Logical exit. As I said at the beginning of this post, there must be a reason for every trade you make. In other words, each trade should be triggered by a certain signal. But sometimes you enter a trade and the price moves against you somewhat but not enough to trigger the stop loss order. After a while the price might still be at the same level but the signal that your used to enter this trade becomes invalid. If that happens, the reason behind that trade is no longer there. And, if there is no reason, there should be no trade. Therefore you must exit this trade or at least reconsider your stop loss order.
3. Opposite signal generated by your trading system. Sometimes you have an open position and your trading system generates a signal in the opposite direction. It’s time to exit the position or at least move your trailing stop order closer.