Forex trade size or position size has more significance than the timing. You may have the Best Stop Loss Strategy in Forex, but if you don’t know the size of a trade or position, you may take either too much risk or too little risk.
Taking too much risk evaporates an account too quickly. The risk is generally classified into two parts, namely account risk and trade risk.
These elements work together to give you an ideal position regardless of the market conditions, the current trade setup, or the stop-loss strategy that one is using.
Account risk limit
The first step to determining stop loss strategy in forex trade is to set an account risk limit. Many experienced traders risk a maximum of 1 percent per trade.
For instance, in a $10000 capital, the risk limit is $100. With a set account risk limit, all the variables affecting the market may change, but the risk remains constant.
Pip risk
This is the difference between the stop order and the entry point. A stop loss order closes a trade if it loses a certain amount that is set by the trader.
Stop loss order helps to keep the risk within the selected limits. However, each trade has a different pip stop based on stop loss strategy or volatility.
Size of trade
The third step involves determining the position size for the trade.
The ideal position is calculated using a simple mathematical formula; Pip value * pip risk * lots traded is equal to $ at risk.
Selection of best Stop loss strategy
Highlights in selecting your best stop loss strategy:
- Start with a stop limit order to ensure that you purchase at a set price, and you don’t focus on the market price. The market price will often fluctuate while the stop limit order is active, so it is better to work on the set price to keep things easier.
- Decide on the possible gain that you want to get based on the pips.
- Decide on where to set stop loss to protect your risk.
- Exit the position right when you start to gain the profit that you aimed for, or when you hit the stop loss point. Never fall prey to the temptation to stick around and see if it is possible to make more if a currency pair bounces back. This gets you into a bad habit of sticking around for too long, and you can end up losing too much money in the process.
Stop Loss Strategies & Techniques
Now that we have a basic trading schedule down, it is time to take a look at the stop loss strategies & techniques that will help you to decide on the best stop loss strategy to reduce your risks while also helping you to make a profit.
You can either use them individually on their own, or in a combination together to get even better results.
1. Stop loss order
As you identify the best stop loss strategy to use, you should know: what is stop loss order? What is a stop limit order? And How does stop loss work?
Stop loss order is a strategy to protect your funds from more losses in a losing trade by automatically exiting you.
The market price triggers a stop loss order while stop limit order is pegged on a particular price limit. You can set stop loss in pips or percentage.
Setting stop limit orders will limit your losses to a small percentage or pips. Research has shown that 15% or 20% is a Good stop loss percentage for a long-term investor while 5% is ideal for a short term.
Always use stop loss order when using Swing trading stop loss strategies.
2. How does trailing stop loss work?
Trailing stop loss is a type of stop loss strategy that protects your profits by executing stop loss buy order at the stop loss buy price.
Let’s understand how trailing stop works and the trailing stop loss limit. The trailing stop loss limit follows the price and then will represent a certain number of pips off that current price.
If the market does end up turning, Trailing stop loss order is executed. However, trailing stop loss is not required in stop loss strategy day trading.
3. How to set stop loss and take profit in forex
Take profit is an order that will remove the profit that you gain during a trade, while still continuing on with your position.
Setting this type of stop loss strategy is not easy. Stop loss forex indicators and logical decision are used when setting up this strategy.
Set the take profit at a place where it will give you reasonable profits
How to set target and stop loss
When making a trade, you should consider the entry point and where to set stop loss. It is best to have the stop loss order as close to the entry point as possible.
However, ensure that the stop loss order is not too close to the entry point to the extent of stopping the trade before the expected move occurs.
Setting too far might result in huge losses. Make use of stop loss strategies and techniques to calculate the ideal position.
In a volatile market, learn How to set buy stop and sell stop to prevent you from unnecessary losses.
As you trade in currencies be careful not to reach the stop out level in forex.
At this point, your broker will automatically close all your active open positions in a reactor move to the decrease in your stop loss margin.
Forex without stop loss
Just as a coin has two sides, some traders don’t make use of trading tools in the no stop loss strategy in forex trading.
Forex without stop loss relies on following market trends and fundamental analysis.
Using a stop loss strategy is advantageous compared to Forex trade without stop loss.
Conclusion
Selecting an effective stop loss strategy is a personal decision. A good stop loss strategy should protect your funds and minimize losses while providing you a stress-free forex trading.