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2024/05

5 methods to determine the best time to close a position

In trading, there is a saying: “Knowing how to buy makes you an apprentice, knowing how to sell makes you a master.”

There are countless ways to enter a market, such as technical breakouts, pullbacks, indicator combinations, or fundamental analysis. However, professional traders focus more on exit strategies because closing a position is the real challenge in trading. The timing of closing a position directly determines the trader’s profit or loss.

Here are some practical methods for closing a position and some points to note:

1. Support and Resistance Close Method

Many traders often use stop-loss/stop-profit orders to close positions. Therefore, accurately identifying and analyzing support and resistance levels is crucial for timing the close. Consider the risk-reward ratio when using this method to set stop-loss and stop-profit levels.

Observe the previous price movements when shorting a currency and find a high point, such as the stop-loss level. This high point might act as a resistance level in future movements. If the price strengthens and reaches a new high, the short position loses meaning and should be closed quickly.

Additionally, use stop-loss levels to set stop-profit targets. If the stop-loss is set at 100 pips, aiming for a 1:2 risk-reward ratio means setting the profit target at 200 pips.

2. High Throw Close Method

The “high throw method” involves:

  • Buying a currency.
  • Setting a reasonable target price.
  • Closing the position once this target is reached.

To set the target price, use analysis tools like Fibonacci retracement, moving averages, and chart patterns, combining fundamental and technical analyses.

Traders should master the fundamental analysis of the currency’s country and set the target price above the current market price. Spend time researching the correct market trend; if followed correctly, the profit can be substantial.

3. Secondary Peak Close Method

The “secondary peak close method” means not setting a predefined target price but holding the position until the market price shows a second peak sign, then closing the position.

Use technical analysis to identify peak signs from price movement patterns and trends. For instance, double tops, head and shoulders, and triple tops can confirm a mid-term peak and then decisively close the position.

4. Moving Average (MA) Trailing Stop Close Method

Traders often use moving averages to analyze market trends. If the price is above the moving average, seek extended opportunities; if below, seek short opportunities.

Some traders use moving averages for stop-loss purposes. The core of this strategy is that if the price moves from one side of the moving average to the other, the market trend may change. Trend traders should close positions in such scenarios.

As the trend develops, the moving average levels change, and traders must adjust their stop-loss points accordingly.

For example, if the market moves 30 pips above the 100-day moving average after opening a position, adjust the stop-loss by 30 pips, reducing risk by 40%. However, the stop-profit level remains unchanged, improving the risk-reward ratio as the trend continues.

5. ATR (Average True Range) Stop-Loss/Stop-Profit Close Method

This strategy involves using the ATR indicator, which measures market volatility. Set stop-loss/stop-profit levels based on market volatility; a high ATR value means setting broader stop-loss levels to avoid market noise triggering narrow stops. Conversely, a low ATR value means narrower stop-loss levels suffice.

Using ATR to set stop-loss applies to any time frame. Ensure the risk-reward ratio is 1:2 and avoid altering stop-loss/stop-profit levels once set.

Conclusion

Choosing the entry timing tests the trader’s market analysis skills while closing a position tests the trader’s techniques and mindset. Discipline is crucial in trading; hesitating to close a position can result in missing good opportunities. Take immediate action if the following situations occur during a trade:

  • If the market suddenly moves sharply against your position, significantly deviating from recent fluctuations, close the position immediately.
  • If a short (long) position enters a resistance (support) zone but the market consolidates instead of reversing, close the position.
  • If unable to monitor the market for a period, close all positions or ensure all open positions have stop-loss orders.
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