Stop loss invented by cowards?
Of all the problems faced by the trader, the problem of his attitude to protective orders is the most difficult. Rarely do players understand at once that it is not for nothing that the experienced traders and well-known masters of online trading repeat from book to book, from article to article, how necessary a stop-loss is for successful trading in Forex.
The beginners shrug off this advice without considering protective orders in the Forex strategy for beginners, preferring to live in captivity of illusions. To them, stop-loss seems like a waste of money. Indeed, what if the protection works and the deposit is deducted? Some people see a global conspiracy against traders. They say that the stop-loss was invented on purpose, to make the currency market players lose money for no reason.
And only after several accounts are wiped out, and tears are shed, newbies grudgingly open the forgotten books and flip through them in search of words that seemed unnecessary to "future millionaires" yesterday. And now they are thinking about risks, money management and stop-loss, but now with a completely different understanding and approach to the problem.
Rules of working with a stop-loss
It's time to learn, understand and apply the rules of stop-loss order operations.
1. A stop loss is working by the rules.
Forex trading without a stop-loss is a guessing game with the exchange, similar to a casino. In this game, the one who deals the cards, in our case the forex exchange, always wins. And do not think that if you are lucky in this game today, you will be lucky tomorrow.
2. Stop-loss is set below or above a certain significant level.
There are many significant levels. How to determine the necessary level of stop-loss? Very simply. Here the rule "minus one, plus one" applies, which says that if we enter the trade, guided by signals of a certain time-frame, then we set take-profit at levels of larger time-frame, and stop-loss at the levels of the smaller.
Let us say we entered the trade when we saw a signal on H1. Take Profit, we will set, focusing on levels H4, and stop loss, focusing on levels M15. However, it is better not to place a stop loss close to the levels, but at 10-15 points from them. On a buy transaction, it is 10-15 points lower; on a sell transaction, it is 10-15 points higher. But this distance should be determined independently for each TF.
3. Stop-loss may and should be moved, but only in the direction of take-profit.
When new levels are formed on the timeframe, on which stop-loss is determined, protective order is moved to reduce the risks. This approach greatly reduces the risk of a negative position.
Although you should not move the protection immediately after the price has passed 10-15 pips, unless of course the aim of the trade was the size of the profit. It is better to wait for the correction on the working TF or on a smaller step, and only after its completion move the order to the new levels.
4. Forex is a very dynamic market and the behavior of currency pairs strongly depends on various economic or political news, any of them can short-term affect even an established trend.
Therefore with very small stop-losses there is a high probability of their triggering, which of course will not make the trader very happy, especially when price, after knocking down orders, rushes in the direction which the trader set for his Forex trade. Setting too "long" stops is also not comfortable, because even such protection can work, in case of incorrect analytical calculations of the trader, significantly reducing the player's deposit.
So does a stop-loss on Forex?
As soon as the trader comes to the realization that stop-loss is a necessary tool for risk control, while risk control is the basis for profitable forex trading, from that moment the beginner is no longer a beginner. Now he is almost a professional trader. And his success in this field becomes a matter of time, but it's inevitable.