A Stop Loss order is used to close a trading position whenever it reaches a certain price percentage/point to avoid incurring losses in Forex Trading. Based on its name, the stop loss order limits the losses of the trader whenever a trade becomes unsuccessful. This stop-loss order is considered a very important pillar to manage your risks, the reason why a lot of trading books, webinars, guru, mention and emphasize the use of it.
But the proper placement of stop-loss also plays a vital role in minimizing the loss incurred. Poorly placing a stop-loss order will only cost you a lot of your hard cash. Here are some of the things that you need to remember when placing a stop-loss order and its management as well.
1. Determine the Placement of Your Stop Loss in Advance
Right before opening a trade, you must be able to identify where to place your stop-loss order. This is also the same with the target and entry, it should be identified beforehand.
One particular benefit of determining the placement of your stop-loss order before the trade is to remove your emotions from clouding your decisions. Since you are not yet spending your capital, then it is just right to decide on the placement of your stop just by looking at your trading chart.
2. Don’t Place Your Stop Loss Based on the Arbitrary Numbers
One of the most terrifying mistakes a trader can ever make is to force the market to fit in with your framework. Though it will be so convenient if some magic numbers exist, they actually don’t exist. As for placing the stop loss, it must be decided through the use of technical analysis. Placement of stop-loss must not be predicated with those magic price levels. The market actually doesn’t care about the R: R that you greatly desired.
3. Don’t Move Your Stop during Tough Times
The main purpose of your stop loss is to shield you from incurring too many losses when your trading plan doesn’t go on your way. When you move your stop loss to break even, you are actually calculating the placement of your stop loss based on the arbitrary numbers. Your stop loss must go to where you have decisively wrong trade ideas.
Stick to your original trading plan. Let the financial market prove that you did wrong when hitting the stop loss you originally placed.
4. Don’t Set Your Stop Loss at the Pockets of Liquidity
Take note that there are price structures that are regularly taken over by liquidity just before the market takes its reverse. Prices are inevitable. But if you use stop loss on your positions, your investment will be secured even if the prices go in an unexpected direction.
5. Don’t Ever Move Your Stop
The purpose of putting stop loss is to protect your account whenever the market goes out of hand. But if you move the stop, it will totally knock down your account in Forex Trading. This decision is entirely made based on emotions.