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Strategy Specific Exits

Strategy Specific Exits

Well tuned strategies require well tuned exits. These may include a combination of several exit or may include specific exits for differing scenarios.

As an example this review considers  a strategy based on major news announcement such as the Nonfarm Payroll (NFP) Report. In USD related pairs these reports often lead to large swings. A trader may wish to capitalize on a predicted currency pair movement once the report has been published.

Following, the trader has no more need to actively hold the original pair as it was simply a play on the outcome of the report.

In the case of the NFP report (or any volatility causing news event) a trader may have a series of exits planned.

One is the initial stop-loss - this is the maximum loss the trader is willing to take. The second is a trailing stop – as the rate moves in the trader's direction so does the stop. A third exit strategy may be to lock in profits if the situation develops where the trend could quickly reverse. Therefore, as a third exit a trader uses a candlestick pattern (for example) – if an engulfing or other strong reversal pattern occurs the trade is exited.

In the figure below the NFP report was released at 8:30 AM (ET) on May 6, 2011, the news caused a spike in the USD/JPY. On the breakout a long trade is entered, with a stop-loss placed just below former support at 80.20. As the trade progresses a red bar occurs, but the rates moves higher once again. The stop is trailed up to this new support point. Several bars later a bearish engulfing pattern occurs (circled) and the trader takes the profits on that reversal signal.