In order to control your risk, you have to learn how to define and place your stop losses. Stop losses are points at which you know it’s time to exit a trade. When you reach this point, you know that the situation has become unsalvageable, so it is far better to cut your losses and preserve some of the invested funds than to stay with the trade and risk losing everything. Not only can this technique help you save a lot of money, but it can also significantly reduce stress. So read on and learn how to use forex stop losses properly!
Forex Stop Losses | Types and Settings
We can divide forex stop losses into four categories: percentage stops, volatility stops, chart stops and time stops. If you base your stop on percentage, you’ll use a predetermined portion of your account (the amount you’re willing to risk in a trade). The problem with this type is that you set your stop at some random price level. It will probably be located very close to entry or it will be set at some price level that doesn’t take any information from Forex Technical Analysis into account. Instead of setting it arbitrarily, you should set your stop in accordance with the market environment. Follow the system rules and not the amount you’re ready to lose.
As for the volatility stop, you’re actually trying to guess how much some currency pair will move. If you use the volatility stop you’ll never leave a trade too early. If you know the average volatility, it can help you set your stop at the right level. The third type of stop losses is based on charts. You basically observe your price actions in order to find support and resistance areas. The last way to stop your loss has to do with time. You simply predetermine when you want to exit and then do so regardless of how unfavorable the market situation is.
Forex Stop Losses | Rules and Mistakes
Placing forex stop losses may not always be easy, especially if you’re still an inexperienced trader. Fortunately, there are some useful tips we can give you, since this is where many traders make mistakes. First of all, don’t place your stops too tight. If you do that, the price won’t have any space to move before it starts to head your way. But you don’t want to place your stop too far as well, since the situation can then easily get out of hand. Another thing you should also avoid is placing stop on support or Forex Resistance Levels because the price can still turn and head your direction upon reaching that level. In addition, it is also recommended that you place your stop before calculating your position size.
Forex Stop Losses | Conclusion
At the conclusion of our Forex Stop Losses article, we’ll repeat one more time all stop setting possibilities. You can place your stop based on the volatility, percentage, charts or time. Every method has its benefits and you can choose it in accordance your trading preferences. Whatever you do, though, always remember the stop setting rules: don’t place your stop too tight or too far and don’t place it on support or resistance levels. If you want to learn more about trading, however, browse around our website – there are more interesting articles that can help you.