One of the tricky concepts in forex trading is the management of stop orders. A stop loss order is an order that closes out your trading position when your losses on that trade reach a loss amount you set when you initiate the stop loss order. In this Blog, we will explore how to apply stop loss orders appropriately in FX Trading.
Click on below video: Why Some Professionals Don’t Use Stops
Setting up the Stop Loss Order
There is no clear rule of thumb when it comes to placing the stops, but there are some recognized approaches.
If your trading strategy is a forex day trading style, you might set a stop just outside the daily price range of currency pair you are trading. In this way, if the forex market suddenly breaks the trend that prompted you to initiate the trade and then moves far enough in the losing direction, your account is protected because of your position is closed automatically by the stop-loss order.
If your trading style is more of a swing trading style, you might set stop loss further into loss territory perhaps two to three times greater than average daily trading range.
Click on below video: Why Your Stop Loss order in Trading Hits
Remember, the point of stop loss is to end the trade when the market goes far enough in reverse direction that a return to profitability seems unlikely. Faced with a loss, you may find it difficult to face the fact that you made the incorrect decision. Setting the stop when you enter the trade can help you to draw that line that protects you from an even greater loss. That is why it is important to know how to apply stop loss in Forex Trading.
Stop Loss Strategies
1. Multiple Stops and Harvesting Stops.
Among forex traders, there is a belief rarely matching the reality that if you set a stop, your market maker may manipulate the market to “harvest” your stop and claim the profit from your loss.
To protect against this, many traders put in multiple stops and some closer to the current trade price than others so that no single currency value will harvest the entire trade. Realistically, however, few traders probably almost no individual traders make trades large enough to make such a move worthwhile even if the market maker had no qualms about engaging in the practice. Keep in mind that this is a business with a $5 trillion daily trading volume.
For other reasons, however, it can be a good idea to set up the multiple stops. A sudden but limited move away from trade position may take out your first stop or even second, but if the market then reverses, some portion of your trade will still be active.
2. Stop and Reverse
The stop and reverse stop loss strategy include a stop at a certain loss point and simultaneously enter into a new trade with a stop in the opposite direction. Using this strategy requires more market savvy than beginning traders can be expected to possess. Also, not all brokers accept this particular trade as a single order. In those cases, once the first stop is executed, you will need to execute a new order and enter the new stop in this new direction.
3. Trailing Stops
This strategy addresses the trading maxim, “Let Your Profits Run, and cut your losses short” One way of achieving this or at least a good way of making this more achievable in trailing stop. As the name implies, a trailing stop trails behind the market price by a fixed amount. If your trade is moving into profit, the trailing stop moves upward with the rising market price. This way, the percentage of loss you are willing to tolerate remains about the same as market moves in your favor. If the market moves against you the trailing stop, having moved upwards as you profited, protects you from a market move that wipes out a profit.
To trade more profitably, it is a prudent decision to know how to apply stop loss and take-profit in FX Trading.