Where to Put a Stop Loss in Forex Trading

by

R_Stevens

When you learn Forex trading you will be required to know either one or a range of strategies to use on a daily basis in order to make a profit. Once these strategies make profit for you consistently you will slowly become more confident and risk more income with increasing the size of your positions. However, once bigger risks come into play a lot more emphasis needs to be placed on the ways to protect your trading capital. This is when you need to seriously think about a stop loss.

To define, a stop loss is a concept that you are required to use from the first day of your Forex trading training. It is your friend and it is there to protect your money. Whenever a trade is placed, you will analyse three variables: 1. Entry price 2. Target price 3. Stop loss price Whilst entry price and target price are usually covered in a Forex trading training course, stop loss seems to be an ‘experience’ led subject. However, placing a stop loss is a lot easier than people think, especially if you have just begun to learn Forex trading as you have no frame of reference. Some traders place a stop loss 10% below the previous swing low or high, no matter what strategy they are trading. For instance, if you are placing a buy on a trend line breakout, a stop will be placed 10% below the previous swing low. If you are placing a sell under a trend line break, you will place a stop 10% above the previous swing high. The level of aggressiveness varies from trader to trader. Some traders like to be extra safe and place a stop loss just a few pips below a swing high or a swing low whilst others place a stop either 10% or a few pips below/above the beginning of the actual trend. So, if you are placing a buy on a trend line break, a stop will not be placed below the previous swing low but a lot further down below, where the trend began in the first place. Trading in any of these manners is not right or wrong – the only thing you have to consider is whether it suits your trading personality or is in-line with your Forex trading training. Once you begin to learn Forex trading training you will soon notice that the best way to find a stop loss placement for your trading style is with back testing. Once you decide on a trading strategy, have a look back at months of data to see how the strategy has worked. You will certainly see examples of price reaching a stop loss level after which it bounced back into your direction. Once you find an appropriate stop loss level, simply add a few pips onto it to give your price room to move in the future. Once your stop loss level is confirmed, test it on a demo account and after ten or so trades you will have a good idea on whether it is working or not. If not, simply give it more room by adding a few pips onto it or go back to view similar, historical trades to see if you need to re-think the whole stop-loss concept.

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Where to Put a Stop Loss in Forex Trading