The importance of using stops when trading Forex

May 25 • Forex Trading Articles • 1328 Views • Comments Off on The importance of using stops when trading Forex

Throughout the constant big conversation we have with our clients, through our blog and regular articles, we constantly remind you there are no short cuts, or life hacks available when you trade forex. In professions such as retail forex trading, there’s often no alternative other than to roll up your sleeves, begin trading and learn from the experience (good, bad and indifferent) you gather on your journey.

Using stops and applying them effectively and correctly, is one of the most important trader (life) hacks we can employ, it will buy you the time we previously mentioned, in terms of having an increased probability of slowing down your account loss, therefore allowing you to stay in the game longer as you experiment with your first, funded, live trading account.

It’s impossible to ascertain the exact statistics regarding how using stops will either save our account, or how much longer it’ll keep us trading during our early years. However, limiting your loss per trade by the use of stops, whilst adhering to the strict money management/position size rules embedded into your trading plan, will undoubtedly ensure that you’re playing the probability percentages in your favor.

How and where to place stops

How and where to place stops, is one of the many critical and additional skills we have to develop, in order to become highly proficient traders and there are certain accepted standards successful traders have adopted in relation to where to place stops, which have proven to be constantly effective in protecting gains and preventing losses. It’s impossible in this short article, to demonstrate all the succinct issues regarding the complex issues of stop use, therefore we’ll use our standard example of a day trader, using the key pivot points as a potential method of trading, whilst also using stops as part of our overall trading method.

Novice traders should quickly familiarize themselves with the daily pivot point, it’s calculated by establishing the various: high, low, close and open relating to the previous day’s trading session. We’ve learned that the first levels of resistance and support represent both bullish (resistance) and bearish (support) levels; if price breaches R1 we consider the security to be in bullish territory, if price breaches S1 we consider the security to have entered into bearish territory, these key pivot points can form part of a method/strategy involving the use of stops.

 

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Avoiding common mistakes of placing stops

One common mistake novice traders make is to use the same value for each stop loss, for example; they’ll use a random and nominal value of perhaps twenty pips as a stop loss on each trade.

There are far more efficient methods of calculating appropriate stops, based on a manual day trading style, involving using the day’s high and (or) the day’s low.

Let’s suppose you establish bullish conditions in the marketplace for EUR/USD; price has moved up to reach R1, shortly after a high impact news event is encouraging for the Eurozone and the single bloc’s currency. This news event has been published at a time when liquidity/activity is generally high in the market, perhaps midafternoon London/European time. You then decide to enter the market long. You quickly establish where the day’s low is recorded and place your stop close to, or precisely on this low.

You’re judging that bullish conditions will end if price reverts from the R1 level to fall back to the low printed on the day. This value may be far less than a random pip value, it may be more, and however, it relates specifically to the market behavior on a particular day, as opposed to a consistent value chosen without any basis. Moreover, by precise use of the position size calculator (which should be available on your chosen broker’s website), you can adjust the stop value to still match the precise percentage risk you wish to put on per trade.

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