Stop loss is one of the major tools of risk management. Summary on setting stop loss order in forex is an overview of all we covered in previous lesson.
A stop loss automatically closes your position when a trade goes against you hence limiting your losses.
What is a stop loss order in forex?
A stop loss is an order which exits your trade if a certain price level is reached.
It protects you from further losses in case a trade goes against you.
You should set your stop loss a few pips from your entry level either up or down depending on the direction of the trade.
For a buy/long position, set stop loss below your entry and above entry for a short/sell position.
Your stop loss should not be too wide or too tight but should instead be adjusted according to your position size.
Most traders make a mistake of fitting their stop loss to their desired position size instead of fitting their position size to their desired stop loss.
The different types of stop loss orders
Percentage stops.
Here, you set your stop loss basing on the percentage amount of money you want to risk per trade.
Volatility stops.
You set stop loss depending on the current volatility in the market.
When there is high volatility, set a wide stop loss and when there is low volatility, set the stop loss closer to the entry level.
In addition, you can measure price Volatility using volatility indicators such as Average True Range (ATR) and the Bollinger bands.
Swing Stops
In case you are a swing trader, you can set stop loss picking out market tops and bottoms.
Some of the technical indicators you can use include; chart patterns, support &resistance, Fibonacci retracement levels and channels.
Time Stops.
Last but not least, you can also set stop loss depending on the time you will spend holding an open position and the trading session you trade in.
How do you set stop loss
On your trading platform, After entry;
click on the entry price level on the chart, hold the left click and drag to the opposite direction of your trade.
When you cover your predetermined risk or pips on stop loss, release the left click.
Alternatively, you can fill in your stop loss order price at the same time when filling in your position order.
At times your stop loss order may be rejected in the system if it is not enough to cover spread on the currency pair.
Keep adjusting until you get the right price.
Some of the common mistakes traders make while setting stop loss levels:
- First, setting stop losses too tight. You last in a trade for a short time.
- Second, setting stop losses that are too wide. May lead to big draw downs
- Third, setting stops losses exactly on the levels of support and resistance. Price may hit and reverses immediately to your predicted direction.
- Last but not least, shifting the stop loss further when price is about to hit it.
Stop Loss Rules
- Set stops that match the current volatility in the market.
- Close out a failed before reaching stop loss.
- Do not widen your stops because a trade is about to hit your stop loss.
- Do not set your Stop loss exactly on the levels of support and resistance.
Why you make small profits and take big losses?
Major Reason why You make Small profits and take Big Losses in Forex is because you have lost market objectivity. This is due the influence of greed, fear, regret and revenge. You trade what you are thinking instead of what you see! The problem is that traders want to...
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