Stop losses are a method that assists in cutting forex trader losses in unfavorable forex market conditions. This method protects trader from unknown impulses along with undesired volatilities of market. You will not have to worry about any prefixed requirements regarding placement of stop losses & traders will have to take a decision depending upon rules of trading as well as current market conditions.
Here in this article we will go through few tips on properly using stop loss plus information on ideal placement of these stop losses.
Guidelines on using stop loss
1. Avoid using one stop loss for every executed trade till the time market conditions have been fully studied.
2. Do not use stop losses that remain quite close to current prices.
3. The stop loss also need not be far from the starting point of your trade.
4. Keep away from risking more than the profit goals & only perform forex trading if the situation exists for earning 2 points in comparison to loss of 1 forex pip.
5. Remember that loss of one or two trades that cost a maximum of hundred points is a lot better compared to loss of something more than thousand forex pips.
Location for placing stop loss
1. Utilize 10 pips over/below a point at which beginning Parabolic SAR shows up over/below the price candles for trades which are shorter/longer.
2. If a stop loss formed from SAR is far away from investorӳ entry point then it indicates the entry to market has been late & in such situation not entering the market is more advisable.
3. It is better to use two MAs that are of value 55MA & 144MA respectively & the stop loss is to be positioned around 10 pips over/under any of these two moving averages depending on the way profit/loss got set for long/short trades.
4. Keep the stop losses 10 pips under/above the Bollinger bandӳ upper/lower part based on consideration that it is a short/long trade.
5. If forex trader utilizes theory called Elliot Waves to analyze market condition then in such situation stop loss should be placed 10 pips below the lowest point occurring in second wave while there is bullish trend. In addition to it, it is advisable to place stop loss 10 pips below the lowest point in fourth wave in case the long trade is used on 5th wave.
Abovementioned tips about right placement of stop losses relies on the four hour chart & strategies are going to be different if trades that are of short duration are entered. The tips we have discussed so far about proper use of use stop losses are very beneficial in conditions in which trades are occurring against the trader.
From the above discussion you may have understood that different methods plus strategies are present that can be used to correctly setup stop losses so that chances of losing the investment are lesser. By correctly following the tips we have mentioned above about placement of stop losses, you can be certain that losses occurring because of uncertainties of market will remain minimum.