There are 3 common mistakes traders make while setting stop loss in Forex. Forex Stop loss doesn’t work if not set properly.
It’s one thing to set stops and another thing to have them set correctly. If you decide to do risk management for your account, make sure you do it right.
This does not only apply to setting a stop loss but also position sizing and risk reward ratio.
If not done right, it can still cause failures to your trading career and you are out of the system without achieving your dream of making a Million dollars.
All the 3 elements of risk management should coordinate and should be considered first before taking any trade.
Good risk management helps you to make quick decisions in case the market conditions change during the course of trading.
Common mistakes why forex stop loss doesn’t work
1. Setting stops that are too tight.
Most traders have a tendency of setting stops that are too tight with an intention of minimizing big losses.
This is the main reason your forex stop loss doesn’t work!
When you set very tight stops, your trades will close prematurely and then the market turns around and goes as predicted.
You may some times think that your stops are hunted by your broker.
However, this is not the case. The reason is because you did not leave enough room for prices to stretch.
Your stop loss should only get hit when you are wrong about the market prediction.
what stop loss is good for your trades
Set a stop loss that gives your trade enough room for price fluctuations and at the same time match your risk to reward ratio.
If you always suffers premature knock outs a few minutes after taking a position, then there is a serious problem with your choice of stop loss.
You don’t have to increase your risk amount to set a proper stop loss. Not at all! All you should do is to adjust your position size using the same risk per trade.
If you find it hard to set a correct stop loss, we advise that you first trade on a demo account.
Practice and try out different position sizes until you get the right size that will fit your stops and your strategy.
It’s free and available for you to learn as long as you want. Till you feel comfortable then you can get back to your live account and trade using the right position that fits your stop loss.
When you Set tight stop loss, it suffocates your trades.
Price has a tendency of first hanging around your entry point most times and then takes off later.
If your stop loss is too close, chances are high that price will hit it before it moves in the desired direction.
2. Setting a stop too wide or no stop loss at all
Another common mistake traders make is setting a stop too far from the entry point because they are scared to lose.
To trade with a very large stop loss, you have to use very tiny position sizes which in turn gives low profits no matter the number of pips price covers.
Using a very small position size may save you from making big losses but your account will not grow. You must use appropriate position sizes according to your strategy.
This common mistake is likely to happen when you have been hit out the market due to using tight stops.
Because every time your stop is hit the price turns around and moves back to your predicted direction.
You therefore choose to set large stop loss or do without it.
It is of high risk and very reckless to hold trades with no stop loss. When you trade with out a stop loss, you expose your account to very large losses when a trade fails.
In addition, a big stop loss cuts your reward and holds part of your capital as margin for your losing trades. This reduces your free margin and limits you from taking more profitable trades.
3. Placing your stops exactly on the levels of support and resistance
The support & resistance levels, pivot points, highs and lows of pin bars are most times reversal levels.
At these points price is likely to reach, hold and reverse.
So, if you have been wondering why your forex stop loss doesn’t work, this could be it!
When you set your stop loss exactly on support or resistance, you are likely to be stopped out and then then price reverses back to your predicted direction.
You should set your stop loss a few pips above or below these levels.
For a long position, place your stop loss a few pips below the support.
Similarly for a short position, set stop loss slightly above the resistance.
Last but not least, never increase your risk to have a larger stop.
Instead try to fit your position size to your desired stop loss but NOT fitting stop loss to desired position size.
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