The Use of Stop Loss Orders in Forex
Forex stop loss is a function offered by brokers to limit losses in the midst of market volatility that moves in the opposite direction to the beginning of the transaction. This function is implemented by setting the stop loss level, a certain number of pips from the entry price. Stop loss can be placed in a buy or sell position making it a useful tool for any forex trading strategy.
The Importance of Stop Loss Orders
Stop loss orders are important for many reasons, but they can actually be summed up in one thing, traders can never see the future. Regardless of how strong the preparation is, or how much information is pointing in the same direction. Future prices of currencies are uncertain, and every trade is risky.
Forex Stop Loss Strategy
Below are five strategies to apply in forex traders transactions when placing stop loss orders:
Setting Static Stop
Traders can set a stop order at a static price with the anticipation of allocating a stop loss, and not move or change the stop until the transaction reaches the stop or limit price. The convenience of this stop mechanism is its simplicity, and the ability for traders to ensure that traders are looking for a minimum one-to-one risk-to-return ratio.
For example, consider a swing trader in California who initiates positions during the Asian session, anticipating that volatility during the European or US sessions will most affect the trader's transactions. This trader wants to give traders flexibility in trading, without giving up too much equity if the trader is wrong, so the trader sets a 50 pip static stop on every position the trader triggers. Traders want to set a profit target of at least the stop distance, so each limit order is set at least 50 pips. If a trader wants to set a one-to-two risk-to-result ratio on each entry, a trader can simply set a static stop at 50 pips, and a static limit at 100 pips for each trade.
Static Stop Based on Indicator
Some traders place static stops one step further, and traders base the static stop distance on indicators such as the average true range. The main benefit behind this is that traders use actual market information to help set those stops.
So, if a trader places a 50 pip static stop loss with the same 200 pip static limit it can be seen as a small move. Using indicators such as average true range, or pivot points, or price swings can allow traders to use the latest market information to more accurately analyze a trader's risk management options. Average true range can assist traders in setting stop levels using up-to-date market information.
Manual Trailing Stop
For traders who want maximum control, stop orders can be moved manually by the trader himself as the position moves in the trader's favor. The chart below highlights the stop movement on short positions. As the position continues to move to support the move (lower), the trader then moves his stop level lower. When the trend finally reverses (and a new high is created), the position is then terminated. Traders adjust stop positions to lower swing highs in a strong downtrend.
This is how to use forex trading stop loss that we can explain. Watch the video below for more information!
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