Participating in forex trading without the use of stop loss is a recipe for disaster; it is like digging yourself a premature grave which could easily be avoided. The reason behind this will be discussed in detail in this article so read on!
Every day hundreds of traders – both new and old – lose a large sum of their earnings or investment because they placed a trade without using protective stops. They failed to safeguard their trade should in case something goes wrong. The sad thing about most of these traders is the fact that the money they lose is worth weeks, months, or even years of trading; all of which could have been avoided.
Anyway, the term “stop losses” does exactly what it implies: that is to stop you from losing money as much as possible. In the rest of this article, you’ll see four of the main stops you could use to protect yourself against profound losses.
Simple Equity Stop: When it comes to forex trading, traders are thought to restrain from taking risks that are more than 2-3% of the total account per trade. As an example, say a trader with a $1000 USD account places an order for 4000 units on EUR/USD, which gives him around $0.40 cents per 1 pip. Since the 2% – 3% risk he is thought to take stands at $20 – $30 ($1000 * 2%-3%), which yields $20 – $30/ $0.40 cents = 50 – 75 pips when calculated. These pips are the limit for this trade.
Chart Stop – this stop relies on a number of chart patterns, indicators, and signals received at the time which the market was analysed. There are several of this depending on the forex trading platform but the main thing to keep in mind is that it requires being able to read forex trading charts.
Margin Stop – This stop loss method is recommended only for expert foreign exchange traders. This is because it works best for traders who are more than happy to place all their money at once on a particular trade. If a trader knows nothing about how the market works, risking everything on one trade could be a disaster.
Volatility Related Stop – Price volatility can also be used when placing a Stop loss order. With this method, traders place stops further than usual to avoid seldom price noise so that they only react to major price changes. During the trading hours of a low market volatility, protective stops are placed closer in order to react in time should the market accelerate.
