Exit Strategy is a very important approach for any trader who wants to keep his capital from disappearing. Any successful trader can lose, but what differentiate successful traders than others is how much loss can they accept. They cut their loss short. Traders must avoid catastrophic losses by all means, and they can achieve this by using Exit Strategy.
Exit Strategy is also important for traders who are in profits and don't want to turn their profits into loss by choosing the right time to get out of the trade.
There are several Exit Strategies out there, but we will focus on three kinds in our article.
1. Moving Averages
In this strategy, we use 20-day EMA with 50-day EMA. You can also use it with different EMAs length or time frames to see which best for you.
The strategy is so simple, we exit our trade when 20-day EMA crosses under 50-day EMA. As a confirmation, you can wait for the price to retest the 50-day EMA and bounce back off it.
In the ETH/USD chart below, 20-day EMA crosses under 50-day EMA, this is the first signal of a trend reversal, so we waited for the price to touch back the 50-day EMA as a confirmation and exit our trade. Traders may also take this signal to open short positions.
After we closed the trade, Ethereum has declined sharply.
Let's take another example, below is the GOLD daily chart. As you can see 20-day EMA crosses under 50-day EMA. Also, the price touched back the 50-day EMA. Therefore, we exited our trade.
After we exited the trade, Gold fell more than 10%.
2. Head and Shoulders
Head and shoulders is a well-known reversal pattern. When spotted in charts traders expect a reversal in price is more likely to happen. You can see them on all charts length. It consists of a head ,two shoulders and a neckline as shown in the chart below. To validate the pattern, price must break down the neckline.
The exit point should be placed below the neckline. In some cases, the price may retest the neckline before it resumes its way down. Thus, retests of the neckline may be taken as a confirmation to exit any open positions.
In HT/USD daily chart below, the Head and Shoulders pattern is spotted in the chart, so we placed our exit point just below the neckline.
After we closed our open position, HT/USD plummeted from $4 to $1.50.
3. Trend Line
When a major trend line is broken, it is a signal of a trend reversal. We should exit once the trend line is broken. Usually, the price retests the trend line before continuing the fall.
Below is USOIL daily chart, the price broke down the uptrend line, thus, we placed our exit point below the trend line.
Now, let's use two exit strategies in one chart. I will use the same above chart for my example. I employ the trend line and moving averages strategies on the USOIL chart. Notice how amazingly the two strategies gave us the same exit point. We exited the trade with confidence.
After our exit, OIL dropped more than 20%.
