Exiting a Trade at the Right Time - dummies

By Kathleen Brooks, Brian Dolan

In currency trading, it’s frequently said that timing is everything. Truer words were never spoken. But that line applies to trying to time your entry and exit to capture tops and bottoms in the market — market timing, in other words.

The time of day and the day of the week can frequently influence how prices behave and how your ultimate trade strategy plays out. If you’re trading ahead of major data releases, for example, you need to be aware that price action is going to be affected in the run-up to the scheduled release, not to mention in its aftermath.

There’s no set way that prices will behave before data releases, but you still need to be alert to upcoming events that may dictate changes to your trade plan.

Similarly, if you’ve been positioned correctly for a directional price move in the New York morning, for example, you need to be aware that there may be a price reaction as European traders begin to wind up their trading day.

Some London closes may see the price move continue in the direction it was going; other times, the price move may reverse. The question for you as a trader, though, is: Do you really want to find out which way it plays out?

At the minimum, you may want to make adjustments to your trade strategy to limit any negative impact from session closes, such as reducing your position size, tightening stop losses, or squaring up altogether.

Depending on the day of the week, you may be looking at different liquidity conditions (such as a holiday, a month end, or a quarter end, which frequently see lower liquidity and the chance for outsize volatility).

If it’s a Friday, the market will be closing for the weekend in a matter of hours. If you hold on to your position, you run the risk of being exposed to weekend gap risk. Do you want to wait until the last minute and expose yourself to the uncertain price action?

Staying on top of the time of day is as important a trading consideration as having the right position. When it comes to adjusting your trading plan or closing out your position, it frequently pays to be a clock-watcher.