Forex Stop Loss Trading Strategy
There are five strategies to apply in forex traders transactions when placing stop loss orders:
1. Setting Static Stops
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; with the anticipation that volatility during the European or US session will most affect traders' transactions. This trader wants to give traders flexibility in trading, without giving up too much equity if the trader goes 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 risk-to-return ratio of one to two on each entry, a trader can simply set a static stop at 50 pips, and a static limit at 100 pips for each trade.
2. Static Stop based on Indicator
Some traders place static stops a step further, and they base their static stop distances 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 sets a 50 pip static stop loss with a 100 pip static limit as in the previous example - what does a 50 pip stop mean in a volatile market, and what does a 50 pip stop mean in a calm market?
If the market is low, 50 pips can be a big move and if the market is volatile, that same 50 pips 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 their risk management options. Average True Range can assist traders in setting stop levels using up-to-date market information
3. Manual Trailing Stop
For traders who want maximum control, stop orders can be moved manually by the traders themselves as positions move in their favor. 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.
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