Applying stop losses in forex trading is one of the trickiest concepts. Stop losses will directly close your position whenever losses hit the predetermined level. It is effective for trading during severe markets.
There have never been rigid rules about the right time to place stop orders, yet there are some guidelines for it. For instance, forex day traders can set up stop orders to stay away from the daily price range of his or her currency pairs.
Stop loss protects the position if the market direction that initially brings on the trade, but suddenly reverse. Or, the other trading style that may require setting stops is swing trading.
More Stop Loss Strategies
Here are the types of stop-loss strategies.
Multiple Stops and Harvesting Stops
There is a false belief running among forex traders that market makers will manipulate the market if traders set stop losses. They believe that market makers can claim some profit out of it.
Thus, these traders use multiple stops, with some usually are closer than the others. That way there will be no currency value that will harvest their entire trade.
Other than that, traders usually set multiple stops to stay safe when their first or even second stops moved away from their position. That way, whenever the market reverses, there will be some portion of your trade remain.
Stop and Reverse
With stop and reverse strategy include a stop at a certain loss point, but it will directly enter a new trade. This strategy may sound interesting, yet, it requires more market expertise than what most new forex traders own.
Moreover, not all brokers agree on putting this strategy in a single order. They usually prefer to execute the first stop, alone. Then, execute a new order that reverses the initial order with another new stop.
Trailing stop allows you to implement the old trading saying ‘let your profit running, cut your losses short.’ This strategy trails behind the fixed amount of market prices.
If you trade to gain huge profits, then, the trailing stop moves upward together with the rising market price. With the trailing stop, the percentage of loss you can tolerate will remain the same, as the market swings in your favor.
Once the market moves against you, the trailing stop protects what you have gained.