Anything from global politics, central bank rumors, and significant economic events can turn in a flash the currency prices than you can snap fingers.
Therefore, it means that you will take a position eventually on the worst side of the market move.
However, stop orders can be used to save you a lot of losses as use them for trade entries as well as exits.
But how good do you understand the stops?
Forex trading is open 24 hours, and a trader may not keep the eyes open all the time. Therefore, entry orders come to play.
An entry order allows setting a price to buy or sell a given currency ahead of time and executed only when the set price is hit.
A stop order is triggered in situations whereby an upward breakout of a price is above the resistance or when a downside breakout of the price is below the support level.
So, how is an Entry Stop Applied?
Breakouts are indicators of a move towards the break occurring. Therefore, as a trader, you’ll have to identify the resistance as well as the support correctly.
Traders should look at the wedges, triangles, or necklines in chart patterns for support and resistance lines.
The price bar has to breach above the resistance break or below the support break for a breakout to occur, but if it merely infringes but doesn’t close either of them, then the breakout hasn’t happened. You should always confirm a break to set the entry stop.
An exit stops simply an order to exit a trade at the stop price. An exit stop is used to protect the gains already acquired but not realized yet. In such scenarios, the exit stop is trailing.
Also, exit stops can be used in safeguarding further loss when a trade is in the losing position. In such a scenario, the exit lose is a protective stop.
Like entry stops, setting good exit stops is essential to limit the risks of losing capital as well as profits.
They shouldn’t be made too loose to give up a lot to the market, or tight enough to lose on good profit.
Setting Protective Stops
Always a protective stop comes before trade entry. The reward sort after is the primary consideration for the risk taken.
For instance, if you realize that where you decide to place your protective stop, the profit as a reward will be 3-times less the protective stop distance, then rather not take the trade.
Also, resistance and support levels are significant in setting protective stops. When going long on an asset with a define line support, consider the stop below the support level.
However, if it’s short on a given currency pair, consider the stop above the resistance trend line.
Setting Trailing Stops
They are used in chasing advancing prices that already have attained profits. They protect against price reversals occurring at any time without being foreseen.
For instance, when there’s down-trending price action and that the broken support will eventually become a resistance, then a trader can put a trailing stop above a market price.
Besides, other methods that can be used to set a trailing stop are like the percentage gain, intrinsic Volatility, and Parabolic SAR indicator.
Setting a Money Stop
In this scenario, it assumes that the trader knows how money he’s willing to lose while pursuing some gain. The technical analysis doesn’t come into play in this case; hence, putting some risk. Therefore, technical stops produce much better money management results than money stops.
Can you change the stop orders?
One thing for sure, stops are meant to protect your capital. Therefore, adjusting stops, especially protective stops, is not the best practice.
A stop should be kept intact to inculcate the trading discipline as well as keep your risk level stable.
Adjusting the stop can negate the 3-times principle of reward-risk ratio and maybe equal the risk with the reward.
However, in the case of trailing stops, adjusting is possible as there’s no possibility of a loss.
What can happen is only smaller profits than expected. Therefore, you can adjust the trailing stop but in the direction of trailing price.
The Bottom Line
Becoming a professional forex trader, one must vividly understand the true meaning of stops in the market. After all, they help save capital as well as not to lose the already gained profits.
Remember to avoid placing stops too close to entry price to avoid trades being stopped too soon.