Know How To Place Stop Losses?
Currency prices in the forex markets are always jumping up and down. Forex markets are volatile most of the time. In the short term, you will only find noise in the intra day forex market. This makes it difficult for new day traders to know how to put a stop loss. Most of the time, prices in forex markets jump 10-20 pips for no apparent reason.
This becomes frustrating for many new day traders. Most constantly find their stop losses being tripped due to noise even when the rates are going in the anticipated direction.
A static 10-20 pip stop loss is an arbitrary choice many traders make. Many new traders also use Trailing Stop Loss. Place your trailing stop loss too close and you will find your stop hit too early. Place it too far and you will have to forgo potential profits if the price retraces.
You should place your stop loss on dynamic levels. Most of the professional traders do use stop loss but mostly place it on their computers making them invisible to their brokers.
No body will ever tell you that your broker may be stop hunting against you. When a broker finds many stop loss orders at a particular rate on his price feed; he will try to trip these stops using a momentary blip in the feed. If you complain the broker will explain that the momentary spike happened due to a sudden large transaction in the market.
More often than not, professional traders, trade with a stop loss at all, only keeping a mental stop loss. But you will need a lot of experience to trade this way.
Dynamic stop losses can be easily placed using Moving Averages, Bollinger Bands, SARs etc. Using a dynamic stop loss is a good way to manage your risk while letting the currency markets do what it wants.
The more experience you will develop as a forex trader the more you are going to understand that placing fixed stop losses actually hurts more. Using fixed stop losses can hurt you more emotionally, psychologically and profit wise than help you.
Try not to trade just before or after a major economic news release. Try not to place stop loss close to/at round numbers. And try not trade in times of thin liquidity in the currency markets.
It is important for you to know that brokers constantly use stop hunting to take out your positions using noise in the market as an excuse. Learn how to beat the markets and the brokers.
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