Forex Trading – What is Stop Loss

December 6, 2012

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What Is Stop Loss In Forex Trading

In Forex trading, knowing where to location stop loss is a major ingredient for success. A good quantity of traders neglect this important aspect of trading and end up causing a great deal of unnecessary damage to their trading accounts. Stop loss refers to an order placed in the marketplace to stop you from incurring losses if price goes against you. When in a lengthy position, a stop loss order is usually placed some distance beneath the point of entry. And, when in a brief position, a stop loss order is usually placed some distance above the point of entry.

You will find various methods you can use to set stops, a few of which are

  • Equity Stop
  • Volatility Stop
  •  Chart Stop

Equity Stop

Equity stop, also referred to as percentage stop, will be the most typical type of stop and it uses a predetermined fraction of a traders account to compute the distance the stop loss order ought to be placed from entry. For instance, you can be willing to danger 3% of your account in a trade; therefore, you’ll use this position size in computing where to place your stop loss order.

Volatility Stop

Volatility stop refers to placing a stop based on the quantity a market can possibly move over than a given time. This technique ensures the proper stop loss levels are placed so as to stop being taken out of a trade because of the random rise and fall of price. For instance, if you are using the swing trade strategy and you wish to trade the EUR/USD, you’ll not place your quit loss at 20 pips. This is simply because EUR/USD moves by about 100 pips each day.
Chart Stop

Chart stop is putting stops according to what the charts are saying. A good way of achieving this is putting stops according to substantial help and resistance levels. When you place stops beyond support and resistance levels, you can rest assured that your stops cannot be hit because they can potentially hold price from pushing via them.

In conclusion, stop losses are of essence in cutting down your losses when trading currencies. Regardless of what the marketplace does, when you have a correctly placed stop loss order, you wont be spending sleepless nights. The Forex marketplace is usually very dynamic in nature, so you never know when price will turn against you. Therefore, it’s important to place some preventive measures in place.
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