If you are a forex trader or planning to become one in the future, one of the main hurdles you come across during the trading process is exiting your trades at the right time. The point at which you exit your trade or close a position will decide the ultimate result of your trade. But most traders need help determining the optimal exit point for a trade. Each and every forex trader must have had an experience where they regret exiting a trade way too early. This is a very common problem faced by traders, and today, we will teach you to avoid common mistakes in trading by using the appropriate forex tools in the best possible manner.
Why Do You Exit Trades Too Early?
Before learning about the tools and tips that can help you avoid early exits, we will try to understand the reason behind this habit of closing your positions before the set targets are hit. The primary reason for this tendency of traders to exit their trades could be the fear of losses. Most traders tend to close their winning trades as fast as possible because they fear losing profits due to a trend reversal. But most of the time, these trades could have generated more profits if traders were brave enough to let them run for some more time.
The case is similar for losing trades, too, as traders tend to exit the losing trade even before the set stop loss levels are reached. They think there is no point in waiting and try to minimise the losses. But such trades may turn out to be profitable later on due to a potential trend reversal. Many traders are also impatient to hold onto a trade as they get hit by anxiety, stress and self-doubt. So, they choose to get done with the trade and feel at ease quickly. The root cause of all these behaviours is always the emotions that divert us from our target.
Planning for the worst possible scenario is important for risk management. But you should remember that the stop loss and take profit levels are set to safeguard your account balance in any situation. For this, you can use a pip calculator, which helps you determine profits and manage risks effectively. As a result, you are better aware of when to exit a particular trade. Hence, manually exiting these trades could be better, as you already set automated exits.
Main Contributing Factors to Early Trade Exits
- Pessimism – Pessimism is something that comes from past experiences that have negatively impacted us. After encountering a failure once, we keep obsessing over the possibility of another failure. We fear this failure and end up quitting even before reaching our goals. This kind of pessimism can force traders to exit their trades way early. They don’t see the possibility of gaining more from a winning trade but feel they will lose if they wait longer. This pessimistic attitude can be a contributing factor to early trade exits.
- Not Applying Trading Psychology – Most new traders spend a lot of time learning about the ins and outs of market and trading concepts. They work hard to learn various strategies and acquire the analytical skills to plan their trades. But they need to remember to learn about one important aspect: trading psychology. More than just having fundamental and technical knowledge is required to become a good trader. You need to control your mind and trade with the right mindset. Many of us don’t pay enough attention to trading psychology, which makes us prone to making early trade exits as we get overpowered by our emotions.
- Not Having Enough Market Knowledge – Another contributing factor in early exits of trades is the need for more market knowledge and the inability to track the direction of the trend. Those who are sure about the profit potential of a winning trade will only close their positions after the targets are hit. Having a solid understanding of the market conditions is very important for executing your trades with perfection. Those who don’t have this kind of knowledge will always make wrong trading decisions in a moment of impulse.
How to Stop Yourself from Exiting Trades Early?
Firstly, you need to understand the reason behind your decision to exit trades early and see if that reason is actually rational or just an emotional bias. One strategy that you can try to let go of this habit is the ‘set and forget trading’. Instead of keeping your eyes glued to the screen all the time, learn to stay away from your monitor after setting your exit targets which include stop loss and take profit orders for the trades. Here, set and forget does not mean forgetting about the trade, but don’t keep yourself attached to the trade. Try to engage your mind elsewhere after opening a position. The trade will run independently and close at the right time when the price targets are touched.
How To Deal With Each Scenario That Makes Us Think Of An Early Exit?
- Trying to Break Even Instead of Accepting the Loss – This is something that most of us do while trading. We exit the trade at our entry price instead of waiting for the price to reach the set stop loss levels. This happens because we are simply not ready to accept losses. Trading is all about managing your losses, and profits will come eventually when you start understanding the market. You can use a profit calculator to better understand making profits, limit losses, and protect your capital. Profits and losses will happen as a part of the trading process, and it’s normal. You don’t need to panic about losing as long as you can afford to lose that much. Just set your stop loss orders at an optimal level and refrain from exiting the trades for a break-even.
- Closing Your Winners Early to Secure the Profits – This is a major mistake that many traders make. We tend to get excited when we see profits, and in an attempt to lock those small profits, you end up sacrificing the rest of the profits you could have earned had you let the trade run for some more time. You should learn to remain optimistic and expect the best results. Small profits look good in the short term, but long-term success can only be attained if you work on fixing your mindset. Practice taking some risks, as rewards are always on the other side of the risk.
- Exiting Trades at a Small Loss Before Hitting the Set Stop Loss – Another common scenario we come across while trading is this temptation to exit trades at small losses as we feel we are limiting our drawdown. But you should stop doing this as it is actually limiting the scope of your trade. Let the market determine the trading results instead of sabotaging your own trading plan.
To sum it up, automated stop losses and take profits are the key forex tools to exit your trades at the right time and price. It takes a conscious effort to stop yourself from exiting all trades too early. Building trading discipline and developing emotional stability are some methods that we can recommend for breaking this habit.