Forex Trading Strategy: “Stop-Loss” Becomes “Stop-Profit”
The forex market is a very dynamic environment with various aspects that need to be considered by a trader in carrying out his forex strategy. The many important things that must be considered sometimes make a trader forget things that are (considered) small, but it turns out to have a big impact. One of the things that is often considered “small” is stop-loss , which in fact can change your world. In learning forex this time, we will learn to better understand the “little one” who turned out to be this big.
Stop-loss – the full name is stop-loss orders – can be a very useful tool, if you know how to use it. Come on, we peel together.
What is stop loss ?
Stop-loss is actually an order placed to close an open transaction with the aim of limiting the risk of loss. For example, you open a forex transaction: Buy 1 lot of AUD / USD at 0.81400. As a forex strategy to limit the risk in trading you place a stop-loss at the price of 0.81000. This means that if the price then drops to 0.81000, then your transaction will close at 0.81000 with a loss of $ 400.
Positive and negative sides
There is no one who wants to experience losses, but in trading you want it or not you have to learn to face these risks. It was mentioned earlier that you can limit the risk of loss that you may suffer by placing a stop-loss .
The positive side of placing stop-loss is that you don’t need to keep looking at the price movement chart. Simply place the stop-loss level and your risk is limited by itself, without you need to be stuck in front of your monitor. Even – extreme – you can turn off your computer and go shopping, play billiards, or watch your favorite movies. Your risk is limited by stop loss .
But every thing has both positive and negative sides, as well as stop-loss.
A scenario like this can happen: the stop-loss that you place is only “poked” by the price movement, then the price reverses and instead meets your profit target. For example in the example of the transaction mentioned above (Buy 1 lot of AUD / USD at 0.81400; stop-loss at 0.81000): after the price hits the 0.81000 level ( stop-loss ) it turns out the price immediately rebounds and even reaches 0.81800. Quite suffocating, huh?
But try thinking like this: You NEVER know what will happen next. In other words, you – even anyone – never know for sure the next market movement. In forex trading all possibilities can occur: prices may rebound , but ALSO CAN CONTINUE DOWN MOVEMENTS so that your losses will be even greater and the forex strategy that you have painstakingly compiled is no longer useful. All opportunities open.
The question then is: can you deal with losses that are greater than just minus $ 400? Which is more painful: losing $ 400 (according to your risk tolerance), or experiencing a much greater loss because you don’t limit your risk?
The most important thing is that stop loss allows a trader to make decisions immediately without emotional involvement. People tend to “fall in love” with their transactions; he did not want to dispose of the transaction even though the losses were mounting. Such traders always hope and hope the market will turn around. In fact, in waiting for it, the risk it faces is getting bigger.
The rules put stop-loss
In forex trading , you must – even MANDATORY – learn to apply forex strategies that need to limit risk. All successful traders agree with this.
The key to minimizing the possibility of stop-loss “licking” by price movements is the stop-loss placement technique itself. We recommend that you follow the signal at the time-frame which is not too short to avoid sudden price movements. Place your stop-loss a few pips above the key resistance (if your position is sell ) or below the key support (if your position is buy ). Technically, there is a method that teaches placing around 100-200 pips (to quote 5 decimal places). There are many methods for determining key resistance and support, you just learn it.
Even more important is to place a stop-loss in accordance with the risk tolerance that you have set in the trading plan. For example, you have a capital of $ 10,000 and allocate a risk of 5% per transaction, so your stop-loss should not exceed $ 500.
Not just limiting losses
The origin of stop-loss aims to limit losses, as the name implies. But in its development, stop-loss turns out to be able to also let the profits you have had the potential to become even greater. How to?
The technique is called “trailing stop” . In this case, “stop-loss” no longer plays a role in limiting losses, but “locking” profits at a certain level. What is the story like?
Let’s return to the example of the transaction mentioned earlier.Assume you do forex trading and open a AUD / USD Buy position at 0.81400. You have learned that you have to limit risk, and as a forex strategy you put stop-loss at 0.81000.
Apparently then the price continues to move up; say up to 0.82000. At this level, you have obtained unrealized profit of $ 600 (the condition of floating profit is when your position is profitable but the position has not been closed). In these conditions, instead of closing the transaction, you actually move (the term amend ) stop-loss which was at 0.81000 to 0.81600. Thus, if later the price drops from 0.82000 to 0.81600, your position will close at 0.81600, with a profit of $ 200.
In forex trading , top-loss is the easiest forex strategy but has a very significant impact on your efforts to limit risk. It is true that there are other ways such as switching or averaging , but all of them have side effects in the form of a much greater psychological burden.
Even though it’s easy, unfortunately, many traders who “fail” to use it, whether it’s to limit risk or lock in profits. You must treat stop-loss like an insurance premium, where you never expect to use it but when the risk occurs, you remain calm because you know that you already have a security.
The loss is not good, but it is more unpleasant if the losses suffered are mounting because they are not restricted. It hurts in the wallet …
So, use stop loss.