In this trading course, I will educate you about simple and effective entry and exit strategies when trading the financial market.
As a trader, you need to ensure a well-defined level to execute a position in the market and at what level would be best to exit such a position either in profit or loss. Successful traders are those who trade according to a set of rules or plans, while unsuccessful traders are those who trade based on emotional interest.
Before building effective entry and Exit strategies, we need to decide which time frame is suitable for our personality. There are four types of technical traders in the market, and they are:
- Scalpers: Trades from 1 minute to 1-hour chart.
- Day traders: Trades from 1 hour to 4 hours in the direction of the daily chart frame.
- Swing traders: Trades from 4 hours to daily chart in the direction of the weekly chart frame.
- Position traders: Trades from Day chart to weekly chart in the direction of the monthly chart frame.
The type of trader you chose to become would greatly influence when building or making decisions about your entry and exit strategies in the market.
I’m a day and swing trader. I’m confident enough to let you know the entry and exit strategies I will show you that this course would be effective for any of the four trading methodologies listed above, provided you follow the rules.
TAKE NOTE: No trading system is 100% infallible to the market; healthy money management is the foundation for successful trading. Therefore see the market as always right whenever things go as not planned.
Professional traders think first about exit before planning about entry, while novice or public traders focus on entry as the primary focus. Money is emotional and thinking about profit without the risk involved is one of the major killers of 90% of traders who fail to trade the market.
POINT 1: Define the risk level
There are various ways to define our risk, and they are listed as follows:
- Implementation of Risk Reward Ratio ( RRR)
- Implementation of Key-levels ( Support & Resistance )
- Implementation Signal Bar Structural formation ( Engulfing bars, Pin bars e.t.c )
- Implementation of Benchmark level ( Fibonacci )
- Implementation of chart patterns boundary definitions ( head and shoulders, double tops, e.t.c )
- Implementation of the wave of trends ( Swings highs & Swing lows )
To properly utilize this above-listed risk definition guidance, you have to consider the size of your account. I advise beginners not to risk more than 0.5% to 1% on each trade and not to execute more than three total trade positions.
TAKE NOTE: Do not set your exit target level based on your pain level but apply based on technically reasonable levels to the structures or formations of the market. The market does not care; neither does it hate you!
- Define The Risk-Reward Ratio ( RRR)
R is coefficient is 1, which means for every 1 point you are willing to risk, you look forward to gaining 2 points.
- Excellent risk-reward ratio: 3R and above
- Good risk-reward ratio: 2R
- Fair risk-reward ratio: 1R
- Bad risk-reward ratio: 1/2R
- Worse risk-reward ratio: 1/3R and less
- Too good to work out risk-reward ratio: 6R and above ( this depends on your trading time frame)
Below is an image to give more understanding about defining exit and entry Strategies based on risk-reward ratio.
As you can see in the image above, the distance of the bearish pin-bar nose to the resistance point R is 25 pips and the distance from the nose to the support point S is 225 pips. There was enough room for sellers acting based on the bearish pin-bar for a higher possibility of a bearish rally.
This means the total length of the bearish pin bar, which was the technical sell signal, measures 30 pips + 25 pips, which equals 55 pips. Below is the breakdown of the risk-reward ratio analysis.
As a trader placing your stop loss at the bearish pin bar’s tail signifies you are willing to risk R = 55 pips, which means if the trade should go against R’s coefficient, then it’s the right time to exit such trade.
Remember, the distance from the resistance to the support level measures 250 pips. This means there’s enough room for the sell set up to run into profit before getting to support level.
In this kind of trade, a trader can utilize the 2R, 3R, 4R and 5R to take profit target since 55 pips can be derived almost five times in 250 pips. This is also applicable in a bullish setup.
For every 1 point to risk, you are willing to gain the R’s multiple value numbers.
This is an example 1 of an entry and exit strategy when trading the financial market.
POINT 2: Define The Key-levels ( Support & Resistance )
Support and resistance level are the technical foundation of trading. Trading without the proper understanding of key-levels is like driving a car and having your eyes closed; you know the result of such a journey.
Please don’t get confused when you hear the words demand and supply; it also means support and resistance. I remembered when I was new to trading; this got me confused.
Demand means a level where many market participants wish to buy, and that’s from support, while supply means a level of interest for more market participants to sell, and that’s from resistance.
Whenever support is broken, it turns into a new resistance, and whenever resistance is broken, it turns into new support. Below is an image to understand support and resistance levels in relation to price movement on the trading chart.
You can see how prices always obey these key-levels at point R, S, and these are the levels or zones you should apply your entry and exit level whenever you wish to execute a position in the market.
Avoid application of exit at your pain level, and this is why many inexperienced traders stop loss from being hit most of the time in the market.
Below is an image displaying how to properly define exit and entry Strategies in relation to key-levels in the market.
To properly apply an exit level, you need to ensure there’s some little distance away from the key-level you target as your point of exit. Let’s refer to the image above.
We can see the bullish rally continues from bar 1 to bar 2, and it broke point X, which is a resistance now turning into new support. Bar 3 confirmed point X as new support, thereby carving a bearish harami.
This bearish harami suggests if a bullish close should occur above the bearish harami of bar 3, then it’s an indication for the continuation of the bullish rally. Therefore an entry order can be placed some distance above bar 3 while stop loss below point X, which is the support.
You can see on the image there are two structural or technical levels to apply our exit; I would prefer SL 2 so as to have enough room for the setup to breathe.
Bar 4 ensured a bullish close above bar 3, which its summation with bar 2 gives a bearish harami.
Now study bar 5; what do you notice?
We can see bar 5 made a strong bearish retest, and there was a bullish rejection due to the bullish forces which acted at point X and which is the active support.
Imagine having your stop loss at point X or at the low of bar 3; the market would have smiled at you, thereby stopping you out of the trade.
The raw truth is; the market doesn’t hate you nor does it like you, it operates based on human Psychology. The market studies our behaviors and can read our mind and that’s why it’s always the master to all traders.
No easy route to profit in the market, and to be successful in trading, you have to get done your assignment. We can see how bar 6 went further to drill a lot of traders, some traders would have exited their position, but traders with deep knowledge of key-levels would have ensured their bullish sentiment is intact.
Bar 6 took price to bar 7 at point Z which is 120 pips from entry level at bar 3. There wasn’t an historical level of resistance in this market
therefore; the Risk Reward Ratio Exit Strategy would have been our guidance to exit this trade in profit.
It’s time I show you how to apply exit based on buying to the resistance level; this is also applicable to selling to support level.
It’s much easier to exit a trade at resistance or support level if there’s a historical price level on the trading chart and if there’s not, the Risk-Reward Ratio Exit Strategy would be our guide.
The term historical price level on the trading chart means a previous point of market reversal or rejection of price or a trend.
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PROCEED TO THE NEXT CLASS HERE: Entry And Exit Strategies Part 2