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Stop-Loss Orders, Understanding Power and Risks (Forex Trading)

stop loss trading

How The Stop Loss is Used when Trading, Understand This Today

In this post, we find why stop-loss is called stop-loss, and when it is suitable to use it. We also learn about strategies where to place stop-loss and how the market reacts to stop-loss.

How does stop-loss works on forex trading?

stop loss trading


A stop-loss is a method of stopping the trade in case a change in the trading order value causes a loss. A standard stop-loss is called a margin stop-loss, which can get used on any size order. Usually called a "small" margin stop-loss.

What is stop-loss?

A stop-loss is the "point" on the contract where you stop trading. When a trader stops trading on a stop loss, you lose the "point." The Stop Loss chart indicates the "point" that you start to lose money on that particular trade. The Stop Loss chart often called the "Stop Point," but it is often a better title.


A stop loss in a contract is the amount of money that you lose when a trader stops making a trade.

How Do I Use Stop-Loss on forex trading?

Assume a trader who opened a long position in EUR / USD on one crucial support. He placed his stop-loss below that support as protection in case the price keep falling.


Soon the pair began to rise, but at a certain point, it began to fall again and reached the support area which ended up breaking almost to activate the stop-loss order.


At this point, the trader experiences a mixture of disbelief and anger and gets carried away by his emotions, so he removes the stop-loss order hoping the market rise again. In his mind, the trader thinks it was a situation in which he could not fail, and yet the market was sinking.


In spite of this, he cannot sell now since he thinks that "logically" the price cannot go down more (error, it can and way more), whereby he decides to take risks and keep the position open.


Finally, the trader was lucky, and the price begins to rise again, reaches the support, crosses it, and continues to increase, which gives him a significant profit.


At this point, we can think the trader's decision was the right one, and he taught you to stay in the market. On the contrary, it was a severe mistake, and in fact, it is a problem for traders, since this is what experts call "winning the wrong way."


Such a thing happens because the human mind works curiously, remember what you want. In the long term, this trader has surely lost much more money than what he earned disrespecting his stop-loss. However, his brain makes him remember the day he received much money in a buy position with EUR / USD in which he removed the stop-loss order when the market moved against your trade.


The consequence of this; the trader continues with this harmful practice simply because he remembers the occasion when a losing operation became a winner and allowed him to obtain high profits.


In a few words: Always respect your stops.

How do I strategically place my stop-loss and get a profit in forex?

No one never answers this question for you simply because no one else knows you, your personality or trading style, your risk tolerance, funds for trading, and so much more.


You ought to find out yourself through doing a lot of tests and mistakes. While doing such, you discover about yourself, what you can control, what panics you, where your strengths and deficiencies are, and consequently a lot more.


Prepare for: A road of constant profitability is a long and rocky one. Some day you reach where you want someday.

Stop-loss trigger price

The stop loss trigger price is the price point where you decided the position to close when the market was moving against you. Meaning, reducing the amount of money you were losing with that trade. It is key important that you use the right exit point by analyzing the price action because you and I sometimes missed the chance for a better profit because we got out of the trade too early.


The stop-loss trigger price can be a saving point or a frustrating one. We need to be well prepared when choosing our exit points, yes when trading we need to be precautious, but also, we need to make an inventory of our risks tolerance.

Why choose stop-loss on forex trading?

Stop-loss is a fundamental risk management technique used in investment to reduce the risks involved in specific financial instruments which traded for a long-term or short term in the market, which includes commodities, currencies, stocks, and bonds.

The "Good" Stop Loss

Many times, a stop loss is simply a "good" one as it provides the trader with more liquidity and thus a better trading opportunity. The primary objective of the "good" stop loss is to increase the likelihood of making a win or at least a profitable trade.


When a proper stop loss exists, the trade becomes far more profitable, and the trader able to make more profit.


The term proper stop-loss often misused. There are many other options to consider before a stop loss that we are going to examine in this article. A stop loss is merely a way to "play the percentages." It does not tell you if you will "make money by playing the percentages."


When a stop loss we use it correctly, it is a tool that every trader should consider. A functional stop loss could be used to help you become more profitable while still taking into account other factors such as the time value of money. Using a proper stop loss could help you make a profit.

There are three types of Stop Loss strategies:

  1. Volatility stop
  2. Time stop
  3. Structure stop

- Volatility stop

A volatility stop takes the volatility of the market. An indicator of measuring volatility is the Average True Range (ATR), which can help set our stop-loss.


We need to identify the current Average True Range (ATR) value and multiply this by a factor of your choosing. 2ATR, 3ATR, 4ATR etc.


Therefore, if you happened to place a stop loss of 2ATR, take 2*71 = 142 pips. Your stop loss is 142 pips from your entry.


Pros:

The stop-loss works based on the volatility on the market An objective way to define how much you need from your entry


Cons:

It is a lagging indicator because it works based on past prices

- Time stop

This type of stop defines when you exit your trades based on time. Rather than exiting the trades based on price, we exit our trades after X amount of time has passed. We need to limit how much time will we allow before exiting it.


Pros:


  • Will reduce losses
  • With no trading records, we can recognize the optimal amount of time to give our trades

Cons:

  • You may exit precipitately entirely to see price transit in your favor

Structure stop

A structure stop takes into account the structure of the market and set your stop loss accordingly.


Pros:

  • You always know precisely when you're wrong because the market structure has broken
  • You're using barriers in the market to prevent the price from hitting your stops

Cons:


  • You need more extensive stop loss if the structure of the market is large (this results in small position size to keep your risk constant)

What are the pros and cons of stop-loss orders?

Pros:


  • The main advantage of a stop-loss order; helps us protect our money, trying by limiting losses.
  • It gives a sense of security when you go to sleep, leaving a position open all night.

Cons


  • If we do not place the stop loss right, we can exit a trade that later could provide us with excellent benefits.
  • If there is high volatility in the markets, stop-loss tends to ignore the exit point.

How to place stop-loss orders examples

stop loss example

Traders of any kind want to make a profit, needless to say. But it is essential to understand Trading and investment in the stock market is a risky business, which must be understood with good risk management, which involves precise placement of Stop Loss orders.

Before placing Stop Loss orders you should ask yourself these questions:


What is the maximum loss I can accept for this position?

What is the volatility of the instrument I trade in the market?

What level of Stop Loss is best suited to my trading strategy:

Stop Loss or Trailing Stop?

What is my trading strategy?

What funds do I have available to trade?

These questions may seem simple, but sometimes beginner traders do not address these questions and put their capital at risk.


Online trading is similar to classic stock trading. That is, a certain amount of money is invested and a good return is attempted.


CFD trading allows you to use leverage. This type of trading carries risk, so it is essential to have well-defined risk management. This includes a clear strategy regarding the placement of Stop Loss in each of the positions.

Stop-loss strategy day trading

If intraday is your trading style you will undoubtedly consider the stop loss is critical, and you are right. The stop-limit order strategy, also known as a stop-loss, is the strategy that dictates when a trader should stop trading based on market conditions. To recap, the stop-limit order works like this: once the price action of an asset reaches a price and a market value which you feel comfortable with, the stop-limit order triggers.


It is an additional tool that is part of any good risk management strategy. In reality, the stop loss should not be too close or too far, but only in an area which gives you a good expectation of a position above 50% with a risk/gain greater than 1. If you reach this level you are on the right path!


In intraday trading, you have to set your stop loss according to:

  1. The financial asset you are trading.
  2. Your daily volatility.
  3. Your funds in your trading account.
  4. The size of your position.
  5. The potential maximum loss you can accept based on the anticipation you make on the price action.
  6. The acceptable losses for your trading account.

Stop-loss techniques

There are multiple ways of using a stop-loss, but you will never master it if you are not using a strategy.


A trading strategy is essential in your daily trading, it is just a strategy which can save you from going crazy to open positions based on sentiment and not analysis. Forex trading is not betting, nor it is guessing the next up or down for a candlestick. The stop-loss order was meant to protect the funds of the traders, and yet there are too many of them avoiding to use it, simply because they think they can always win or control their trades.


No matter what you think about your trading skills, you will always need to be protective, and a good stop-loss will give you exactly that, protections. Even thou when gaps on the market play you to lose or volatility burns your account. If you had the stop-loss in place and that happened, at least your mind will tell you, you did the right thing, and the market did its stuff. because the markets are unpredictable.

How to Know When to Stop Trading?

To help you make sure you are making the right decision on when to stop trading, we are going to explain in this article how to evaluate your current trading position. To see the right choice to make for you, take a few minutes and read this article about the proper stop loss for a given trade.

I need now to mention the trailing stop-loss

Trailing your stop loss can maximize your profits and let you ride massive trends. However, at the expense of a lower winning rate.


If this is something for you, here's six ways to do it:

  1. Structure break
  2. Moving average close
  3. Moving average crossover
  4. X period high/lows
  5. Average true range from peak to trough
  6. Trend line

Best Trailing Stop Loss Strategy

Traders are searching for the most ideal approach to use the trailing stop (and enter their position in a better way) however, there is no best trailing stop strategy. What is significant is that you set a trailing stop on the hoping to make greater gains in your positions. I like to use a strategy based on trailing stop alongside utilizing price action changing for moves that are outside the typical price.

Utilizing pattern lines doesn't bode well since when prices jabs underneath, for instance, you need to buy and not sell. So extremely, the best trailing stop strategy is one that you fully understand, which will enable you to ride the price action pattern and one that you will reliably trust.

Another order which is worth mentioning is the limit order

A stop-limit order is a powerful tool to use together with a stop-loss order. A limit order is basically a previously defined price of an asset in which you want to enter a trade or get out of want.


As an example, let's say you want to enter a buy trade on EUR-USD at 1 USD, but the currency is trading below 1 USD. What you can do is specify a limit order in which you are willing to enter the buy trade position. Then all you need to do is wait for the price to reach that previously price you set on the limit order, eventually, the buy position will trigger and you will be trading at the established price.


Pros:


If you are a trader who trades the stock market, and usually you trade long-time positions, then the limit order is good for you.


Cons:


you need to wait for the order to be filled in order to activate, which might take days, weeks or sometimes even months.

Aren't stop-loss orders forex most pointless tool?

Yes, if you don't know how to use them. However, a stop loss can be quite useful. The stop-loss orders are the most common (and most potent) for forex traders. There are only two of them stop-loss orders to sell and stop orders to buy.


They are not meant to be the only options in your trading account, just the most important.

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