Know How To Place Stop Losses?

Currency prices in the forex markets are always jumping up and down. Forex markets are volatile most of the time. In the short term, you will only find noise in the intra day forex market. This makes it difficult for new day traders to know how to put a stop loss. Most of the time, prices in forex markets jump 10-20 pips for no apparent reason.

Most of the new forex traders get frustrated to find their stop loss being constantly tripped due to noise even when the market is going in the anticipated direction.

Most of the new day traders use a static 10-20 pip stop loss. This is an arbitrary choice many traders make. How about using a trailing stop? If you place the trailing stop loss too close; you will find your stop hit too early. And if you place it too far; you will have to forgo potential profits if the price retraces later on.

You should place your stop loss on dynamic levels. Most of the professional traders do use stop loss but mostly place it on their computers making them invisible to their brokers.

Because if brokers find many stop losses at a particular price level they can easily trip them using a momentary blip in their price feeds. You cant do anything. It was a momentary spike during to a sudden large transaction in the market. This is known as Stop Hunting.

However, many professional forex traders only use a stop loss in their mind. They continuously keep on updating it until they get the desired outcome. But you will need a lot of experience trading the forex markets to do this.

Using dynamic stop losses such as Moving Averages, Bollinger Bands, SARs etc is a better way to reduce your risk while allowing the markets to do what it wants.

The more experience you will develop as a forex trader the more you are going to understand that placing fixed stop losses actually hurts more. Using fixed stop losses can hurt you more emotionally, psychologically and profit wise than help you.

Try not to trade just before or after a major economic news release. Try not to place stop loss close to/at round numbers. And try not trade in times of thin liquidity in the currency markets.

You should understand that your broker can and will use stop hunting to take out your positions using noise in the market as an excuse. Forex trading and casinos have many things in common. You should learn how to beat the markets and the brokers only then you will become a successful forex trader.

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