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Forex Stop Loss

In terms of trading currencies and achieving success, placing your Forex stop loss is as important as your trading signal entry and its a fact that most traders have less problem picking long term trade direction, than they do placing a stop. A stop must be close enough to give you protection but also far enough away, so you don't get taken out of your trade by random volatility. Lets look at how to place stop losses in Forex correctly in more detail.

A Fatal Error the Majority of Traders Make

A fatal error made by the majority of losing Forex traders is to trade with stops which are too close to their entry level. It's common for most novice traders thinking they can trade with 10 – 30 pip stop losses and think they can win but they soon get wiped out.

The bulk of novice traders trade short term and engage in scalping or day trading but this is a losing Forex trading strategy. Firstly, all volatility in daily sessions is random and furthermore, its not unusual to see a trading range of 100 – 200 pips in a day and these stops are soon picked off. If you want to trade Forex successfully you need to understand this:

You need to focus on longer term trends and use stops which will give you protection but they also need to be far enough back so you don't get taken out by the random volatility of the market. This means using 100 – 150 pip stop losses and if you think this is to much either, your leverage is to high or you are not looking for enough profit per trade as a target. Lets look at how to place stop losses correctly.

How to Place Stop Losses Correctly

When you have entered your trading signal you need to place your stop loss and you should keep the following firmly in mind:

When you enter a trading signal, you will want to place your stop behind a nearby level of resistance or support but make sure you DON'T pplace it within a few pips of the level – this is what the majority of traders do and these stops get picked off by the market and then, the trade goes back the opposite way, these traders had the direction of the trade right but were taken out the market so don't let this happen to you. Place your stop behind, a level of support or resistance (or the next level back) so that when the majority of stops are picked off yours remains in the market.

Trailing Your Stop

In terms of moving your stop, don't move it to quickly because this is another fatal error made by losing traders. As soon as they have a profit, they want to trail the stop but they put it to close and again get taken on on a natural reaction within the trend.

Keep you stop level back outside daily volatility and behind a key moving average and or level of support or resistance on your Forex chart. We like to trail stops behind the 20 day moving average in shorter term trends and behind the 40 day average in longer term trends. Sure you will give a little bit back when the trend reverses but you don't know when a trend will end anyway so that's OK.

If you took just 50% of every major trend and made profits from it, you would be very rich. Don't seek perfection, accept missing a bit as the trend turns and while you miss a bit of the move your banked profits should more than compensate you.

More Stop Loss Placement Tips

Below are some other stop loss strategies you will find effective at increasing your profits and reducing your risk so here they are:

Timed Stop Losses

These stops are particularly effective when you are looking for a big move quickly and we use them a lot in breakout trading. If a break occurs, we will have a target and if the target is not met or the break does not follow through within x time period ( normally a few hours to a day) we will simply execute at the market.

On breakouts if they are good ones, they will normally accelerate away from the breakout point quickly and if they don't. A reversal is likely, as the breakout becomes a fake out. By doing your stop based on time, you can very often come out with a smaller loss or even a profit, rather than a bigger loss which a static stop would give you.

Stop Loss at Market

This we use for various reasons – we all have the felling this trade is not going to go my way or won't be more profit so – “if in doubt get out”. If you do this, you will move to the sidelines on most occasions and come out with some profit or less loss, than if you had stayed with the trade.

Stop Loss Adjustment

Always review the risk of your trade each day and review your stop loss at the same time. Events and technical patterns change all the time so if for example your trading signal is profitable don't wait - if events change get out the market. Review your stop loss everyday - don't just place it and forget it.

Forex Stop – The Key to a Successful Forex Trading Strategy

Most traders like to focus on market timing and getting into the market with pinpoint accuracy but this is not important, if you are looking to trade big trends. Losing traders tend to focus on perfect market timing and place their stop as an afterthought. These losing traders, place stops to close and have no idea, of the impact of volatility and how to place a stop correctly, outside of random volatility and always lose.

When placing stops the above tips and an understanding of volatility,  will not only help you reduce risk, you will also be able to make more money from trends which is the objective of every Forex trader.