Knowing When to Close Your Forex Position

Investing in Forex can be a bit of a minefield, particularly for the novice trader or investor. There is so much conflicting advice out there about what to trade, when to trade, how long you should hold your position, which technical signals you should look for on the charts, which news items are likely to affect currencies, etc, etc. It can all be quite mind-boggling if you are new to the whole thing.

It can also be pretty scary too. Dipping your toe into the water for the first time when making your first forex trade can be an exhilarating, but also gut-wrenching feeling as you watch the currency exchange rate move either in your favour or against you.

So once you have actually made that move and opened up a position, how do you know when to close it? This is one of the trickiest questions that novice investors face.

The temptation is to close the position as soon as it is showing a small profit so you at least have something tangible to show for your efforts. Equally tempting is to hold on to the position if the price moves against you, in the hope that it will turn around and move back in your favour.

Neither of these approaches is recommended. Any successful trader will tell you that what you should always do is cut your losses and let your profits run, not the other way around. The best way to do this in practice is to enter a stop order immediately after you have opened your position. A stop is an order to sell if the price moves below a certain level (if you are long), or to buy if the price moves above a certain level (if you are short).

By entering a stop order, you are limiting your losses if the price does move against you. If, on the other hand, the price moves in your favour, you can move your stop order in line with the price movement to follow the trend. That way you are letting your profits run until the market turns, at which point your stop will be triggered and you will collect your profits.

So the moral of the story is, if you use stop orders in the right way, you don’t actually need to know when it is time to close your forex position, because the stops will take care of that for you.