4 Types Of Stop Losses. Let’s face it. The market will always do what it wants to do, and move the way it wants to move. Every day is a new challenge, and almost anything from global politics, major economic events, to central bank rumors can turn currency prices one way or another faster than you can snap your fingers. Being in a losing position is inevitable, but we can control what we do when we’re caught in that situation. You can either cut your loss quickly or you can ride it in hopes of the market moving back in your favor. The saying, “Live to trade another day!” should be the motto of every trader on Newbie Island because the longer you can survive, the more you can learn, gain experience, and increase your chances of success. This makes the trade management technique of “stop losses” a crucial skill and tool in a trader’s toolbox. Having a predetermined point of exiting a losing trade not only provides the benefit of cutting losses so that you may move on to new opportunities, but it also eliminates the anxiety caused by being in a losing trade without a plan. Of course, it is, so let’s move on to different ways to cut ’em losses quick! Now before we get into stop loss techniques, we have to go through the first rule of setting stops. Your stop loss point should be the “invalidation point” of your trading idea. When price hits this point, it should signal to you “It’s time to get out buddy!” In the next section, we’ll discuss the many different ways of setting stops. There are four methods you can choose from: Ready? Let’s get started! Your Progress. You miss 100% of the shots you don't take. Wayne Gretszky. BabyPips.com helps individual traders learn how to trade the forex market. We introduce people to the world of currency trading, and provide educational content to help them learn how to become profitable traders. We're also a community of traders that support each other on our daily trading journey. Introductions to Stop Loss Orders and Leverage. Q. What is a Stop Loss Order? A: Nobody, but nobody has a 100 percent success rate which is why you need the discipline to cut losses early. A Stop Loss Order is a safety net which limits your losses should the market move against you. When placing a spread bet you are taking a risk that you won't correctly predict the market direction - for instance if you go LONG the market can still go UP or DOWN and if the market goes down this will translate in a loss on your spread bet position. Now, trying to rely on hope is futile - you need to ensure that you have an emergency exit should things not go to plan and this exit is the Stop Loss Order. Learning to accept many small losses allows you to protect your capital for the winning positions, but this is only possible if you have a trading plan. Most providers will insist that you place a stop loss order with your trade to protect both you and them. This is usually placed automatically on trades opened (which is why it is sometimes referred to as a computer generated stop), however you can adjust this stop loss order level anytime. Note also that markets have a minimum distance from the current price where stops will be accepted. You can, of course move the stop further away from the prevailing market price provided your account has sufficient margin. We discuss the different type of stop losses and their uses in this section. Q. How does leverage affect my trading? A: To simplify this let's consider forex. In forex trading, if you are using 1:1 gearing, and your trade moves 3%, your account goes up or down 3%. With 5:1 leverage, when the trade moves 3%, your account changes 15% With 10:1 leverage, your account will change 30%. The same is true for margin trades in spread betting/cfds. . Continues here - Position Sizing: Amount to Risk per Trade and the 2% rule. The content of this site is copyright 2016 Financial Spread Betting Ltd. Please contact us if you wish to reproduce any of it. GET STARTED. Open a demo account to fine tune your trade strategies. Apply for a live account now and you could be trading in minutes. Losses can exceed investment. GETTING STARTED. New to trading or to OANDA? Learn the basics here. TOOLS AND STRATEGIES. Develop your trading strategy and learn to use trading tools for market analysis. CAPITAL MANAGEMENT. Learn to apply risk management tools to preserve your capital. BASICS OF TRADING. Learn the skills necessary to open, modify and close trades, and the basic features of our trading platform. Chapters: TECHNICAL AND FUNDAMENTAL ANALYSIS. A trading strategy can offer benefits such as consistency of positive outcomes, and error minimization. An optimal trading strategy reflects the trader’s objective and personal approach. Fundamental traders watch interest rates, employment reports, and other economic indicators trying to forecast market trends. Technical analysts track historical prices, and traded volumes in an attempt to identify market trends. They rely on graphs and charts to plot this information and identify repeating patterns as a means to signal future buy and sell opportunities. Chapters: PROTECT YOUR CAPITAL INVESTMENT. Leveraged trading involves high risk since losses can exceed the original investment. A capital management plan is vital to the success and survival of traders with all levels of experience. Learn risk management concepts to preserve your capital and minimize your risk exposure. Seek to understand how leveraged trading can generate larger profits or larger losses and how multiple open trades can increase your risk of an automatic margin closeout. Chapters: Execution speed numbers are based on the median round trip latency measurements from receipt to response for all Market Order and Trade Close requests executed between August 1st and November 30th 2017 on the OANDA V20 execution platform, excepting MT4 initiated orders. Contracts for Difference (CFDs) or Precious Metals are NOT available to residents of the United States. MT4 hedging capabilities are NOT available to residents of the United States. The Commodity Futures Trading Commission (CFTC) limits leverage available to retail forex traders in the United States to 50:1 on major currency pairs and 20:1 for all others. OANDA Asia Pacific offers maximum leverage of 50:1 on FX products and limits to leverage offered on CFDs apply. 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OANDA (Canada) Corporation ULC is regulated by the Investment Industry Regulatory Organization of Canada (IIROC), which includes IIROC's online advisor check database (IIROC AdvisorReport), and customer accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request or at www.cipf.ca. OANDA Europe Limited is a company registered in England number 7110087, and has its registered office at Floor 9a, Tower 42, 25 Old Broad St, London EC2N 1HQ. It is authorised and regulated by the Financial Conduct Authority, No: 542574. OANDA Asia Pacific Pte Ltd (Co. Reg. No 200704926K) holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore and is also licenced by the International Enterprise Singapore. OANDA Australia Pty Ltd is regulated by the Australian Securities and Investments Commission ASIC (ABN 26 152 088 349, AFSL No. 412981) and is the issuer of the products and/or services on this website. It's important for you to consider the current Financial Service Guide (FSG), Product Disclosure Statement ('PDS'), Account Terms and any other relevant OANDA documents before making any financial investment decisions. These documents can be found here. OANDA Japan Co., Ltd. First Type I Financial Instruments Business Director of the Kanto Local Financial Bureau (Kin-sho) No. 2137 Institute Financial Futures Association subscriber number 1571. Stop Losses- The Ultimate Guide for a Forex Trader. The subject of Stop Losses is of immense importance to any Forex trader. Why? Simply put, the stop loss level is the ultimate level where a trader chooses to accept a losing trade. Stop losses are however only a necessity because Forex traders use leverage to maximize the potential gains from the Forex market. We will start our article with a quick glance at leverage since it is the reason/culprit why we Forex traders absolutely must use stop losses. The business of Forex. To be honest, I would not be surprised if businesses are jealous of Forex traders because of their fast and easy access to so much the capital. Then again, the high leverage is not given and granted to Forex traders because of banks like us so much. Why can Forex traders have the access to such high levels of leverage? It is a simple business proposition for them. The higher the leverage the riskier the trading becomes. The riskier the trading is, the higher the likelihood of capital loss for the trader. Traders are actually able to access very high levels of leverage. Typically anything from up to 100:1 is very common and nowadays the leverage “mania” continues and some brokers are even offering leverage levels close to 1000:1. Leverage is the risk. Leverage is what makes the Forex business a risky venture. Think about it. If you actually own currency, would you get stopped out? Would there be a need for a stop loss? When you own the currency, you own it. The risk you run is the devaluation of that particular currency versus other currencies. You also run the risk of inflation and that the currency amount you own has less purchasing power in the future. But that is it. Owning and trading your currencies at a 1:1 rate is not that dangerous in fact. The key difference is when you add leverage to the mix. Using leverage is a risky business. If you use leverage and you do not use a stop loss, you are gambling and you are at risk of losing all your capital and getting a margin call. The risk disclaimers are there for a reason, not just for the formality. The warnings are not nonsense. The lower the leverage the better, as the expectancy rate of your capital surviving and sustaining any string of losses increases. With leverage the game is simple: you need to use a stop loss to protect your entire capital or trading capital. The stop loss problems. Without any doubt, a stop loss is a must. But because you must use a stop loss to protect your (trading) capital, you do run a different risk. You run the risk of your stop loss getting hit and your trade taken out. Even if you have the best price entry in the world, there is always that chance where the market takes out your stop loss and then goes in the direction which you anticipated. There is nothing we can do about that. This is a fact of life and trading. What we traders must do and the only thing we can do is find the best return to risk ratio opportunities that succeed often enough. Or in otherwise these trade opportunities create on average a positive expected rate or return in the long run. Another thing traders can do is find the best place for their stop loss in comparison to their type of strategy, the structure of the market, key levels, time factor, a trader’s character &psychology, etc. More on that later on. Stop losses. The first I thing I did when I was preparing myself for this article is to look through the Winners Edge Trading website. There just so many cool articles and I could not stop reading. When browsing and reading I bumped into an article from Nathan who mentioned 3 rules of using stop losses. 1) Always trade with a stop loss – protect yourself; 2) Define your own stop loss and define before you enter the trade; 3) Never move your stop loss unless absolutely necessary; Read here the entire article called “3 rules for using a stop loss”. I will add an easy checklist which you can print out and use. Checklist for a forex trader. When it comes down Forex trading, everything needs to be prepared. A famous Forex expression is to plan our trade and trade our plan. Here are some crucial aspects every trader needs to have in their FX trading plan: 1. Plan your trade before you enter. 2. Use hard stops, even if you have a soft stop. 3. Don’t exaggerate with the leverage levels and try to minimize it. 4. Use adequate stop loss sizes in relationship to realistic reward potential of your trading style; 5. Trade with sufficient Reward to Risk ratios in comparison to your win, break even, and loss percentages; 6. Stick to your plan after the trade begins: take profits as planned and never increase the stop loss size. Stop losses = sensitive topic. Basically, the entire topic is a very sensitive matter for traders because simply put, the stop loss has the potential to cause the actual loss. Therefore there could be the temptation to do something no trader should ever do: to move the stop loss. Stop losses can bite. Read more about stop losses and how difficulties associated with it in this article: “stop losses risk management in Forex trading.” Many a trader has gone through the experience of the phenomena where there stop loss gets hit, after which they see the market reverse back into their direction without them. Read here a personal story from Nathan, the exact same thing happened to him and he writes a very honest article about in “why good trades lose” and how to overcome the loss of money. Another thing that can happen is that the trade barely survives but after hours and hours of waiting, the trader decides to take off the trade, only then to see the currency finally move impulsively in the right direction. All traders have encountered this feeling and it is a rough experience. It is very demoralizing and it shatters the trader’s confidence. It can lead to a trader becoming fearful or reckless. The emotions which can be triggered are very real and dangerous and impede a trader from achieving success. It does not matter how tempting it might be, once you have a game plan, you must stick it. The temptation to ease the pain of a loss could overwhelming and the fear of losing might be tremendous, but whatever the psychological issues that emerge, don’t change the stop loss. It is ok to have a loose stop loss, as long as it fits the strategy setup you are using and you have planned it in advance. So to sum it up, due to the leverage element of Forex trading, Forex traders must have a stop loss, we must define a stop loss level and we must never move our stop, however tempting that might be to avoid the pain of a losing trade. You will be setting yourself up for failure and run the risk of blowing up your account. Never forget that the first goal of Forex trading is to ensure the preservation of the trading capital. When the capital is lost, there is no trading day tomorrow or next week. The big question: where to put the stop loss? Forex trading will always create losses. That is the nature of the market and nothing we do will change that. However, traders are not helpless. There are definitely aspects a trader must consider to improve the quality of their stop losses. Usually, there are two different types of traders: 1) For example, in some cases, the stop loss could be placed too close to the market. A key sign is whether you see many of your trades are being stopped, while later on the trade does actually materialize as planned. The added risk which wider stops create can be compensated by reducing the lot size. 2) In other cases, you might be hitting your profit targets but realize that your reward is not sufficiently compensating your risk. In those cases, you might want to consider tightening your stop loss size. But there are other keys and crucial elements to consider with regard to the best stop loss placement. Read here a great article about using tight stop losses. 1) Currency pairs vary in terms of volatility, spikes, and the average distances on a daily basis. It is recommendable to learn and get a feel for the currencies you trade regularly. 2) Your stop loss depends on the type of strategy. Stop losses can differ depending on the strategy you choose. For example, trending strategies are different than ranging strategies. 3) The time frame you use for trading. Using a shorter time frame requires traders to use smaller stop losses to enable decent reward to risk. Stops for such a scalp/day trade should be different from that of a trade taken for a swing, based on the daily, or higher timeframes. 4) Where are big Fibonacci levels, key resistance and key support levels on higher time frames? These can provide great shelter for stop losses. 5) Your trading character and trading psychology are important to factor in as well. Can your mentality handle a small stop loss? Are you really able to live with a 150 pip stop loss? 6) How does the structure of the market look like? It the currency chopping and going sideways or is there a clear pattern visible? Stop loss levels to consider. Here are some concrete tools which you can use for your trading to actually place your stop loss. I am sure there are more examples but here are a few of them: 1) Fibonacci retracement levels. 2) Tops and bottoms. 3) Swing highs and swing lows. 4) Candlestick highs and lows. 5) Invalidation levels of the Elliott Wave Theory. 6) Consolidation zone / resistance – support areas. Must read materials. There is really tons of great value on the Winners Edge Trading website that you do not want to miss out on. So I am going to make a very easy list for you that summarize the topics connected to Stop Losses. Make sure to read through them this weekend. Ok folks, that’s it for today. I hope you enjoyed it. If you did like, then please leave a short comment down below. You can find the second part of the article here which will give you practical examples where you can actually place stop losses using the tools mentioned above. admin. Latest posts by admin (see all) The Huge Benefits of Being a Scalper - February 2, 2018 Currency Correlations and Using them to your Advantage - February 2, 2018 80/20 Principle in Forex Trading - January 29, 2018. Winner’s Edge Trading, as seen on: Hi Marketman, thank you, I am glad to read that you enjoyed the article. ?? This Friday’s article will address the actual placement of stop losses as well. Hope that will help as well. In any case glad you liked this article and thanks again. Good trading! Chris. Hi E.V., thank you for the feedback on the article. In general, tops and bottoms are indeed good areas to place a stop loss, although there are options a trader might want to consider when choosing the time frame. More on that in this Friday’s article. The topic seems to be very popular so I will write a part II. Thanks again and good trading! Chris. Hi Farah, I am very glad to read that the article is interesting and helpful. Thank you too for your comments ?? and wish you Good Trading this week! Today’s article will be partly on XAG ?? Cheers! Chris. Hi Pete, thank you too for the feedback and for reading the materials. Good trading! Chris. Thank you Eric! Good Trading! Chris. Thank you Harmish! Glad you enjoyed it, good trading! Chris. Hi Joe, thank you, I am glad that you enjoyed the article ?? thanks too for the feedback. Yes will indeed emphasis this in the 2nd part, which will be released on Friday the 5th of April. Thanks again and Good Trading! Great article. Knowing is easy. Doing is harder. Thanks for the excellent information. I’ll read the 11 articles you mentioned – Thank you for providing the links. Thank you very much. That is indeed a fantastic reminder on what I must do. Thank you again and looking forward to your next article. As a beginner, I did not make myself unconfident. by “knowing” much yet ?? (I just feel it is coming), but I certainly. finding myself comfortable using “Tops and bottoms” and “Swing highs and swing lows” in regards to determine my stops. And I would like to admit – our. unconsciousness, probably, is stronger than conscious part when we are. “gambling”, so, to honestly analyze our own performance as a trader. is a first thing to do… Great info guys. Excellent articles, thank you. Hi Chris, great article. You mentioned this, but maybe it is worth emphasising clearly – the stoploss should determine your position size. If it doesn’t then you don’t know how much money you are risking which is scary! This means every trade will be a different size. Trading a fixed size every time may cause huge losses on a single trade. From your entry to your initial stoploss is your risk in pips. Your position size determines the dollar value of those pips, and of your risk. Ideally for every trade the dollar loss potential is a fixed %age of your capital, say 2% or less. ie, if you have $10,000 and your initial stop is 60 pips from your entry, and If you decide to risk 2% ($200) each trade, then for this trade your position size will be 0.33 lots (which is 3.3minilots or 33 microlots or 33,000dollars). As your account grows, the 2% becomes a higher dollar value, allowing a larger trade size for the same pips risked. Nathan has posted an EA previously that automatically makes your position size correct for your risk when you enter a trade. Popular Views. Disclaimer: Trading forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.