How to Determine Stop Loss Based on Price Volatility
Before we discuss more about how to determine stop loss or cut loss, you should first understand what is meant by volatility.
By knowing the volatilty of currency pair prices it will help us determine the stop loss or cut loss points precisely so that our trading positions will not be closed too early due to some false signals or instantaneous price spikes that are testing the resistance or support points.
For example when you yesterday traded a GBP / USD currency pair that has a range of price movements of around 100 pips a day and then you put a stop loss of 10 pips from the buy / sell price then it can be ascertained that your trading position will be closed too soon or too early. This happens because it’s very easy for the currency pair to move by 10 pips.
There is a tool that can help us determine the volatility of the price of the currency pair that we will trade, namely by using the help of the Bollinger Band and ATR indicators. And previously these two indicators have also been discussed in the article entitled ” How to measure forex market volatility “.
How to Determine Stop Loss Based on Bollinger Band
When the band’s bollinger band narrows it indicates that the price volatility in the market is decreasing and vice versa when the bollinger band’s band widens, it indicates that the price volatility in the market is getting bigger. To find this definition you can read it again on the ” How to measure forex market volatility page.
By knowing the value of currency pair volatility will help us determine the stop loss point correctly so that the determination of the volume of the trading contract can be determined correctly.
We can put a stop loss or cut loss point above or below the bollinger band ribbon as shown above.Of course we must first calculate how much volatility the currency pair is in pip units to determine the risk factors for forex trading that we will do.
How to Determine Stop Loss Based on the ATR Indicator
The second way is to determine stop loss based on the volatility measured using the Average True Range (ATR) indicator.
When you use the ATR indicator, you must first determine the time, and the period or number of bars that will be used.
For example, if you choose the GBP / USD currency pair in an hourly hour and you enter the ATR 50 parameter, this ATR indicator will show the movement of the average currency pair for the last 50 hours.
If you already know how much volatility the currency pair will trade, the next step you have to do is to determine the exact volume of the trading contract.
So the point is that we measure the volatility of this currency pair to help us determine how much the risk range in pip units can withstand fluctuating movements in prices in the market. And then the value of the risk (in units of pip earlier) we compare with the percentage of our risk to capital to determine the right volume of trading contracts.
Why should this be done? because so we don’t get stuck with the term trading position closed prematurely.