Stop-losses can be your best friend, or your worst enemy. Used incorrectly, they’ll ensure that you get stopped out on a spike, just before watching a trade move in your favour. This aspect of risk management is critically important. It is my opinion that traders should plan their trades well, and determine stop placement before actually entering the trades. This ensures fill participation in acknowledging, and accepting potential loss on the trade, and by extension, proper position sizing appropriate to our risk parameters.
Firstly, losses are inevitable in Forex trading; however, if you find yourself in a situation of constantly being stopped out on trades, only to see the market play out the way you had anticipated, especially if your entry was good, then it is very clear that the stops are being placed too close to the market. In this case, perhaps you should consider using wider stops and compensating for the added risk by reducing the usual trade size. Also, due to the fact that currency pairs vary in terms of volatility, tendency to spike, and also in the average distance they move on a daily basis, the trader needs to ‘learn’ the pair(s) being traded.
A trader’s style of trading is an important consideration when placing stop losses. For example, stops for a scalp/day trade should be different from that of a trade taken for a swing, based on the daily, or higher timeframes. It is also important in cancelling/replacing (manual trailing) stops on a swing trade, to allow room for the market to wave naturally, and not to adjust stops too early. This allows room in the trade in order to take full advantage of the setup. Often, while trying to save on stops, we eventually incur more losses due to premature stop-outs. Initially, it is good to place stops above/below key resistance/support levels, BUT these levels tend to get retested, and so it is important to keep them beyond these areas. I like to scale out of my swing trades in thirds or halves, and I generally move my stop to breakeven after the first target is reached. This might not necessarily suit everyone, but so long as the trade management allows you to maximize the profit potential of trades while the same time protecting your equity, you may very well have found the Holy Grail of forex trading.Read the original post here