How to Use the Right Stop Loss in Forex Trading
You may already know what ‘Stop Loss’ means. Even for beginner forex traders, this term may already have known and used it, but lacked discipline in applying it. Many have said that the majority of forex traders fail in this forex trading. One reason is the lack of ability to manage money management and underestimate the use of stop loss.
When using the Stop Loss feature, you have to set a point where you can admit ‘lose’ and get out of the market right away. When you have opened a position, you certainly hope that the market will move according to expectations and analysis, but unfortunately all of that is not like that. Therefore you are strongly recommended to use the Stop Loss feature to limit the loss so that it is not too large.
Many professional traders state that “Forex Trading without a Stop Loss, is like driving a car on a road that has a cliff edge without a road safety fence on the side of the road. It’s just a matter of time the worst thing can happen to you. To ensure this silly thing, make sure to use Stop Loss in every position you make.
Then how do you use the correct stop loss? In this paper we will discuss some examples of placing stop loss.
There are several commonly used ways to implement stop loss in our open position, which is like the following example:
Calculating the Possibility of Entry Affected by Stop Loss
The first way is to use how many points / pips you can lose. For example, you open a GBP / USD buy position at 1.6850. If you will only be 50 pips, your Stop Loss is set at the price level of 1.6800. So when the price drops to 100 pips at 1.6750, you are automatically saved with Stop losing 50 pips. Of course it will be smaller than we do not use Stop Loss. Remember, no one knows where the price will be in the future, so it is desirable that you always use Stop Loss.
Placing Stop Loss at Important Levels
The second way is you can use the Support and Resistance levels as a Stop Loss reference point. For Buy position, the stop loss position is ideally below the support level, while for the Sell position / stop loss position it is above the closest Resistance level at that time. You can use the Pivot Point level to determine important levels every day (pivot points can also be calculated at any time frame).
Place a Stop Loss on Round Numbers
The third is using round numbers. Round prices like 1.3500, 112.00, 1,100.
If you pay close attention, sometimes the price is tied to the round number. In addition there are also those who use the round price as a strategy. For example, when prices break away from the level of 1.1200, it is expected to tend to 1.1250. But if it fails it will return to close to 1.1150, like that roughly.
Short-term forex traders usually set stricter stop losses, which is different from long-term forex traders who set stop loss at a greater distance. This is done with the aim of being able to give a little space to prices to move.
Try to set the stop loss level as Natural or Reasonable as possible.