Using stop-loss in trading forex is a recommended risk management practice. It allows you to set a point where you think your forex trading ideas might be invalid. According to Investopedia, a stop-loss is designed to limit an investor’s loss on a security position. Thus, you can calculate the size of your position based on how much you are willing to take risks on forex trading and consider the types of stop-loss that you want to use in your forex trading.
Let’s check out different types of stop-loss that you must know:
Equity Stop
One common type of stop loss is the equity stop. This is also known as a percentage stop. Because it is determined as part of a trader’s account that he feels comfortable losing if the price action does not match trading. This percentage value can vary from one trader to another because this depends on the risk profile.
More aggressive traders can feel comfortable by risking 10% of the account in one single trade. While conservatives may prefer to hold a risk of 1% to 2% per trade. This value can also depend on the trader’s confidence in certain trades. Some traders risk smaller amounts of their account on countertrend settings while taking twice as much risk on settings that follow trends because this might have a higher probability of winning.
Chart Stop
Another type of stop loss is a stop chart, which is usually used by traders who see technical problems. This is based on price action and where the trader thinks that the idea of trading will be invalidated.
For example, you trade based on the trend line bounce. Then, you can set a stop chart below the trend line. After the support area stops, you can be sure that the uptrend is invalid and you must exit your trade. By setting a chart stop, the order will be triggered automatically even if you are not in front of your platform at that time.
If you trade short based on a breakout, you can set a stop loss above the support zone that you think will be broken. If you trade long based on a breakout, you can have a stop below the resistance area that you think can stop.
Volatility Stop
Volatility stops are another type of stop that is usually taken by more advanced traders. It calculates how many currency pairs normally move per day. Additionally, it also sets a stop loss in pips based on that amount.
For example, EUR / USD can move an average of 100 pips every day. Thus, you can set a 100-pip stop loss from your entry, knowing that prices do not usually exceed pip movements in a day. Technical indicators, such as Bollinger bands, can also take into account price volatility so you can Volatility stops.
Time Stop
Finally, time stops can also be useful, especially if you are a long-term trader. This basically sets a limit on how long you plan to keep your trades open. If the price does not move in the direction that you think will provide the time limit you set, then you might be better off closing the trade and using your trading capital in other trades.
Read more: Why do Traders Not Use Stop-Loss?
