Month: October 2019

In Forex trading, knowing where to place stop loss is a major ingredient for success. A good number of traders neglect this essential aspect of trading and end up causing a lot of unnecessary damage to their trading accounts. Stop loss refers to an order placed in the market to prevent you from incurring losses if price goes against you. When in a long position, a stop loss order is usually placed some distance below the point of entry. And, when in a short position, a stop loss order is usually placed some distance above the point of entry.

There are various methods you can use to set stops, some of which are equity stop, volatility stop, and chart stop. Equity stop, also referred to as percentage stop, is the most common type of stop and it uses a predetermined fraction of a traders account to compute the distance the stop loss order should be placed from entry. For example, you can be willing to risk 3% of your account in a trade; thus, you will use this position size in computing where to place your stop loss order.
Volatility stop refers to placing a stop according to the amount a market can potentially move over a given time. This method ensures the right stop loss levels are placed so as to prevent being taken out of a trade due to the random rise and fall of price. For example, if you are using the swing trade strategy and you want to trade the EUR/USD, you will not place your stop loss at 20 pips. This is because EUR/USD moves by about 100 pips each day.

Chart stop is placing stops according to what the charts are saying. A good way of achieving this is placing stops based on significant support and resistance levels. When you place stops beyond support and resistance levels, you can rest assured that your stops cannot be hit because they can potentially hold price from pushing through them.
In conclusion, stop losses are of essence in cutting down your losses when trading currencies. Regardless of what the market does, if you have a correctly placed stop loss order, you wont be spending sleepless nights. The Forex market is usually very dynamic in nature, so you never know when price will turn against you. Therefore, it is important to put some preventive measures in place. Or, is prevention better than cure?

If you had to break a system down to it’s various components, most traders will argue that the most important parts of a forex trading system, or any other kind of trading system for that matter, are its exit strategy and its money management. Money management will be discussed in other articles.

The most common technique traders deploy to protect both their profits and their exposure to risk is the break even stop loss. Once a position is ‘in the money’ or showing a floating profit, traders often move their protective stops to break even, assuming that they are protecting their capital by mitigating any risk the trade may bring. The break even stop is also seen as a way to manage profits by protecting any gains the trader has made on previous trades by mitigating the risk of any trades still open.

Break Even Stop

This is a type of risk management technique where the market price move by a pre-defined levels, you will place a new stop loss at the entry price which will guarantee that in the worse case scenario you will not lose money on this trade.

Let’s say you entered a trade at 1.4000. Let’s also say that you plan to shift your initial stop loss when your trade is in 20 pip profits. The market price reached 1.4200 (20 pip profits). You will shift the stop loss to 1.4000 which means that if the market turns against you it will results in a breakeven trade at the worse.

Whenever a forex trader makes a trade entry, the first thing the trader has to ensure is his exit strategy. Knowing how to manage the trade is the single most important thing about trading the Forex market.

Finally, realise that in forex trading, many traders will have their own preference of how they will exit their trades. Is break even stop the best exit strategy? I will say it depends on how you design your trading system. If you want to increase your system winning accuracy rate, break even stop strategy can be employed to increase the percentage.

If you need to increase a risk to reward ratio (risk 1 pip for 1 pip to risking 1 pip to 3 pip), you will like to avoid using break even stop strategy because you may be stopped out in profitable trades prematurely.

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