Setting stop losses as your trading seatbelt
Stop losses are like seatbelts for Forex traders. They will help a Forex trader stay afloat and grow their capital.
A stop loss is a level at which the market will remove a trader from a position to prevent further loss. The main goal of a Forex trader is always to grow capital. We can cut losses short with the use of a stop loss order on all of our trades.
All Forex trading platforms will have the option of stop losses as part of the trade setup. Should the currency pair reverse, a trader will be able to precisely establish a stop loss at a level at which they must exit the deal.
Why use a stop loss?
There are two basic rules:
Rule 1: Always use a stop loss!
Rule 2: Never move a stop loss once it has been placed.
There is no set or standard way to place a stop loss. The stop loss required in any given situation will be determined by market conditions and the trader’s opinion of where the cut-off point should be.
Without a stop loss, a Forex trader’s account would suffer, and trading will cease to perform like a business. It’s a complete risk. We can avoid significant losses on trading accounts by implementing tactical stop losses.
Avoiding any emotional decisions
When sitting behind the charts all day, some Forex traders may say that they will personally close out the position. Setting a stop loss prevents our emotions from taking control, because we’ve previously decided where the trade should end if the Forex market moves against our trading bias.
As Forex traders, we don’t want to be a part of the group of traders who blow their accounts. We always want to be able to immediately reduce a loss and exit the Forex market before the loss grows too large.
Maintain discipline and let the stop loss alone after it has been set. It’s tempting to imagine that moving the stop loss into a higher loss will offer the transaction more room, but this will simply leave you open to significant losses in your trading account.
How to set a stop loss?
Physically setting stop losses can be easy, but knowing where to place them on the charts can be a more difficult task.
Managing stop losses while a trade is active is a good idea, especially if you want to bank some profits while reducing risk in certain trading scenarios. This can be done in your trading platform.
Percentage of your account
In every trading scenario, you will want to set a stop loss based on a percentage of your account. This will allow you to predetermine the total risk allocated on that trade. If you are trading a standard account, this should be no more than 3%.
Some traders may control their risk by the number of pips or points on that stop loss. So, if they risk 0-40 pips = 1% risk. 40-100 pips 2%. And anything above up to 3%. By setting your stop losses in this way, this you will control the risk exposure and adapt for each situation.
Short trades will be quicker and more volatile. The larger pip trades, on the other hand, will take longer, so you’ll want to be paid for your winnings when they meet their targets.
Identifying the right places
Using indicators to identify key areas to place these stops could be a good strategy. Using average true range or Bolinger bands on smaller timeframes, for example, will give you a sense of structure. After that, you’ll need to set a stop above or below those levels, and if such levels are met, the bias will be invalidated.
Remember that when you use popular indicators and tools, they are accessible to every other retail trader, making them open to manipulation during certain hours.
Traders can make mistakes while establishing stops, such as placing them too close together with insufficient breathing room. If you don’t let the Forex market breathe or vary, it will almost certainly hit your stop loss.
It is a good idea to research and try to understand the currency pairs you trade and monitor their volatility when looking at the size of the stop loss to place. It is not possible to make 100 pips profit if you only gave the trade 5 pips stop loss. On the flip side, you also don’t want to place your stops too wide.
The pip value is the ideal place to search for stop losses. After you’ve determined your pip stop loss and trade plan, you’ll want to consider risk and position size.
Finally, pick a broker or service provider that matches your trading style. You’ll have capital management principles that you define for yourself, so combine that with correct position sizes and you should be in good shape.
Setting a stop loss conclusion
It will be difficult to stay afloat in the world of not only trading but also investing without using stop-losses. They are the fundamentals that should be followed at all times when trading.
Examine your losses if you are a losing trader over a large sample size. In some cases, lowering them can help you become more profitable. Always be in control of your risk and know each trade plan before you execute the position.