For most traders, including ForexOfficials, we must confess, exiting the market is as difficult a subject as it is an important one. Not only do you need to exit the market eventually, you also need to make a certain amount of profit - enough of it to prove worthwhile for you to have even gotten in that market in the first place and taking that initial risk. This is a tough moment psychologically as well as financially.
The amount of disinformation about the “right moment”, the “exact time” to exit the market, thus protecting your profits is staggering. Countless videos and thousands of articles will throw a host of techniques at you, like the idea of the “25% stop” once market moves in your favor or you have a certain hard pip trailing stop where you going to trail it by fifty or a hundred pips, or the theory of the “oversold or overbought market” where you need to get out as soon as this and that...
These are great theories on paper but it’s not how the market operates.
The fallacy of the Oversold/Overbought
First of all, there isn’t a reliable way to determine whether the market oversold or overbought. Even the term itself doesn’t represent fully the mechanisms involved in the market. The reality is, even if market becomes oversold or overbought by a factor of 0,1% it adjusts itself automatically, does it at lightning speeds, and no lagging indicator or a software of any kind will definitively point out the moment for you to exit.
The price action alone will tell you all you need to know without the need for any additional indicator of the market condition, and to say that the consensus is that the market oversold or overbought just shows that the talking heads have no real idea of what’s happening.
2. The importance of being in the trend
The second thing is that by using a trailing stop of a percentage, say, a 25% trailing stop you don’t follow neither the price action, nor the volatility of the market. And these are the two indicators that you need to be following religiously. You could be in a market where the candles are really big, or you could be in a market where they are really small, the point is, in any case you are in the trend.
So, there’s one particularly useful technique to successfully exit the market and protect the profit. We at the ForexOfficials call it “The Five Candles”. In a nutshell, when the market is moving up and you have, for instance, five consecutive candles showing the market moving in the right direction - a higher high here, close at a higher high there, and then close at another higher high and so on. Once the market begins to unravel, you can begin to trail your stop up from the initial “safe” position to the bottom of the candle that makes the higher close.
When you allow the trend do the work for you, once you get a signal to really exit the market, you’ve protected enough profit to just follow the market down while using the same technique on the way.
That’s pretty much it. Let us know what you think of this technique once you’ve tried it and be sure to check out some other great tips ForexOfficials has for you!