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Where To Place Stop Losses?
By Hass67 | April 11, 2009
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Currency prices in the forex markets are always jumping up and down. Forex markets are volatile most of the time. In the short term, you will only find noise in the intra day forex market. This makes it difficult for new day traders to know how to put a stop loss. Most of the time, prices in forex markets jump 10-20 pips for no apparent reason.
Most of the new forex traders get frustrated to find their stop loss being constantly tripped due to noise even when the market is going in the anticipated direction.
Many new forex traders develop the habit of using a static 10-20 pip stop loss. This is an arbitrary decision. Many also try using a trailing stop loss. However, if placed too close; your stop hits too early. And if placed too far; you will have to forgo potential profits if the price retraces later on.
The actual reality is this that many professional forex traders do use stop loss but mostly place it on their computers making it invisible from their brokers. A better method to place a stop loss is by using a dynamic level that changes as the market rate changes.
Stop hunting is something the brokers are continuously doing. If a broker finds many stop losses at a particular price level on his price feed; he can easily trip them using a momentary blip in the price. You cant even complain. The momentary spike happened due to a sudden large transaction in the market.
Do you know this many professional forex traders only use a stop loss in their mind. They plan entry/exit for each position. Keep on monitoring it changing, the stop loss in their mind as the rate fluctuates. When they reach the desired outcome, they close the position. With experience, you will also learn to do the same.
Moving Averages, Bollinger Bands, SARs etc can be easily used as dynamic stop losses by you. It is a good way to manage your risk while letting the currency markets to do what it wants.
With more experience, you will learn that placing fixed stop losses actually harms more. Rather than helping, using a fixed stop loss can hurt you more emotionally, psychologically and profit wise.
Try not to trade just before or after a major economic news release. Try not to place stop loss close to/at round numbers. And try not trade in times of thin liquidity in the currency markets.
It is important for you to know that brokers constantly use stop hunting to take out your positions using noise in the market as an excuse. Learn how to beat the markets and the brokers.
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