When trading the financial markets always use a stop loss to protect your trading account capital. This is especially important when trading the Forex (Fx) markets, when there can be sudden big moves due to fundamental news announcements.
It is often said that ‘the best stop is a great entry’, meaning that as soon as you enter the market, price moves in the direction of the trade and never goes near your stop. This takes time and practice to achieve but is a laudable target to aim for.
I also remember being at an International Traders Conference a few years back and trading live with some top traders and as the novice traders inevitably asked the question ‘Where would you put your stop?’, you could see the expert’s eyes glaze over!
So to answer that novice’s question and put it to bed, here goes ……
- Firstly, I recommend always use a Stop Loss to manage your Risk.
- Secondly, it depends upon what strategy you are using and what that requires, which you will, of course, have back tested a thousand times over before trading live.
- Thirdly, your stop should be placed just beyond a particular technical level, plus an allowance for the spread, beyond which your trade plan is wrong and you definitely want out.
- Fourthly the size of the required stop will dictate (along with your account size) your position size. So if you have a tight stop your position size can be larger, but if you have a large stop you will probably have to reduce your position size, so that your risk on any one trade remains fairly constant. I personally prefer to only risk 1%.
A technical level is above or below a key support or resistance level, beyond a pivot level or a key fib level and so on, but a point beyond which you know your trade was in the wrong direction. If you can’t manage you risk because the stop is too big then stand aside and wait for a better setup. If you need help with these concepts then maybe you could benefit from our Personal Mentorship Programme or from attending our next Forex Trading Workshop/Seminar in London.
Top Trading Tip: Always use a Stop Loss and place it beyond a technical level (also allowing for spread plus a little wriggle room) and manage your risk by altering your position size to match your Stop size, so that your Risk remains fairly constant for every trade. If you can’t do that because your stop is too big, then stand aside and wait for a better set up to occur.