Forex Stop Loss

An essential element of money management when trading is setting a stop, the purpose of this is simple:

1. To lock in your profits as the trade runs.
2. To minimize your losses if the trade turns.

Ever single trading strategy you develop will at some point involve setting the Forex stop loss for that particular trade, and there are many different ways of setting a stop. Some of the critical factors relating to how to set a stop will encompass; the volatility of the market, your trading time frame and your risk management.

Your risk management and how much of your account you are prepared to risk will be the primary determinant. Normally traders will be prepared to risk 2-3%, sometimes as much as 5% but rarely more, as anything above this increases the speed your account will vanish if you have a run of bad trades.

This could involve some calculation which might look like this:

If traded Lot size = 1 which for $US is $100,000 then pip value is $10

Your account is say $10,000 and you decide on a maximum of 2% capital risk.

$10,000 x 2% = $200          $200/$10 (pip value) = 20 pips

So if you decide to open a trade with a lot size of 1 … then for a max risk of 2% you must be able to set your stop loss for a maximum of 20 pips loss following your trading setup strategy.

There are many ways to set a Forex stop loss, these can include:

1. Bar or candlestick count back
2. Setting just above resistance levels or below support levels
3. Average True Range, used more for day charts and stocks
4. Based on the simple MA
5. Simple risk management

Which ever you decide to use, and it may be a combination of different indicator signals and other determinants, you must establish and test your strategy rules. That’s what your demo account is for.

A Trailing Stop Loss

A trailing stop loss is a dynamic stop loss and is used to lock in profits once your trade has moved into profit.

As the trade increases in profit, an automatic trailing stop moves with it, following by a predetermined pip count, 15, 25 or more. It never moves backwards, so the pip count has to be determined by the trading range and volatility of the market. You want your trade to run, but you also want your profits protected if the trade turns.

The platform you are using will determine the settings that you can select.

A manual trailing stop is set be certain determining factors, you move is yourself as the trade progresses. It could be based on a count-back, a previous minor support of resistance level or a retrace. Either way, its position will be determined by your trading strategy.

To learn how to establish and set stops for a swing trade, study these free videos and test the setups on your demo account.