Trading Forex is quite a big risk, so movement in the market can get very unpredictable at times. To save themselves from bigger losses, traders use different mechanisms that act as a preventive measure against excessive losses in the market of Forex. One such mechanism is stop loss, which comes in different forms, and traders can also apply them differently.
Stop losses are quite important, especially if you’ve just started trading Forex, but it’s not easy using them. There’s a lot you have to consider and know when using stop losses. If you want to learn more about trading Forex with a stop loss then read further below.
What is a Stop Loss?
A Forex stop loss is an order placed by traders to protect a significant portion of their existing profits in a specific trading position to limit the risk of a loss. Whenever there’s been a trade placed, you have the option of a stop loss as these are offered throughout the trading process. Once a price threshold is triggered, a stop loss immediately activates a marker order.
Stop losses are consecutively placed by traders whenever they initiate a trade. Stop loss order usually act as a limit to a potential loss. This order prevents the trader from losing a lot, and is quite effective. Stop loses start functioning according to a specified amount of pips that is away from the entry price.
Many traders don’t use stop losses because they don’t see it as an effective mechanism. Nevertheless, it can come in handy for a number of reasons. No matter how strong your setup might be or how much knowledge you have about trading in a particular direction, future currency prices are not easy to predict, which makes each trade very risky. To use a stop loss when trading in Forex, you need an appropriate strategy. To learn more, continue reading below.
Strategies for Trading Forex with a Stop Loss
You can rely on numerous strategies when trading Forex with a stop loss. Before you choose a strategy, it is important to know all of them, and see if you’re comfortable using them. Mentioned below are a few Forex trading strategies you can use when trading with a stop loss:
Manually Trailed Stops
Traders can move Forex stops manually, especially if they want the most control as their position keeps getting higher. When your position as a trader mover lowers in favor of the trader, then traders usually move the stop loss level lower. On the other hand, when the position reverses, with new highs made, it automatically stops out.
Another strategy is to set Forex stop as a static stop in order to allocate the stop loss and not let it change until the trade hits the limit price. This stop mechanism is very simple to use, and enables traders to know that they are looking for a one-to-one risk to reward ratio.
Indicator Based Static Stops
You can take your static stop a step further and base it according to the indicator. Using this strategy is beneficial to traders as they’re using the actual market information to set the stop properly. If you’re seeing a static stop loss of 50 pips with a static limit of 100 pip, then 50 pips can be an impressive move, but only if the market is quiet. If the market is volatile, the same 50 pips you can see as a very small memory.
Traders can use trailing stops to maximize their money management. These stops adjust as the trade moves in the trader’s favor. This happens in an attempt to further manage the downside risk of being wrong about a specific trade.
Fixed Trailing Stops
As a trader, you can also set a trailing top on your own so that the stop adjusts itself when increasing. For instance, whenever there is a 10 pip movement in the trader’s favor, they can set the stop to adjust this movement specifically.
As you can see, stop losses can benefit traders in many ways and it is important to use them when acquiring a specific percentage and to prevent loss. If you’re a beginner or have been trading for a while, make sure you learn about a stop loss with the help of this article.