Basic Stop-Loss Forex Techniques

By Paul Henderson

Stops are an unfortunate necessity of trading life. Forex markets move so quickly that you must enter stops when you enter your trade. Most trading platforms today offer this capability, including scaling stops, and the technique is easy to learn and manage.

The type of stop-loss orders varies from one broker-dealer to another. It is important to remember what standing orders you have in the market at all times. Most trade stations show you a record of all your open orders in the market. Stop-losses may be entered in one of three ways:

1. As a function of price alone. This is the simplest for new traders. Use your trader profile ratios to set a stop-loss as a function of your profit objective.
2. According to the tenets of your technical trading method(s).
3. Above or below support and resistance points.

If you use the third method, remember that many traders use some form of support and resistance analysis. Despite the variety of support and resistance methods, most of them cluster in very similar price areas. Professional traders often use those areas to make contrarian trades-they are buying and selling when your stops are being hit.

No one enjoys having stops sitting in the market, just waiting to be hit by a market whipsaw. It happens, and to everyone. If it happens too often, you will need to make adjustments somewhere in your ratios. Perhaps your stop is too close, in relationship to either your trade profile or the volatility of the market. If a market is moving 20 pips in five minutes, a 5-pip stop may be unrealistic.

Traders easily panic when stops get hit too frequently; that's when emotions can take control of your trading. That may be the time to walk away from trading for a while.

Traders tend to be more objective when entering a market than when exiting. Exiting means your money is on the line and your emotions are more likely to want a say in your decision.

The market is always attempting to get us to second-guess ourselves. If you catch yourself second-guessing too often, stop trading. The market has you where it wants you and is ready to pluck you clean. Your emotions are running the show, and that spells L-O-S-E.

Allocate your trading capital over a series of campaigns, each containing a fixed number of trade opportunities. Give yourself a chance to win. This, too, needs to be realistic and in conformity with your trading profile. Don't expect to have 30 opportunities to make 100-pip profits with a $300 mini account.

If the math and ratio calculations are confusing at this point but you are itching to trade, don't panic. You can allocate your capital in advance in fixed proportions and at least not hurt yourself too badly. Allocate your capital into two or three campaigns of 10 trades each.

• If you are a guerilla, set a 2:1 profit objective to stop-loss.
• If you are a scalper, set a 3:1 profit objective to stop-loss.
• If you are a day trader, set a 5:1 objective to stop-loss.

Paul Henderson is an author, teacher and CEO of a growing network of international companies focused on helping investors from all walks of life learn how to diversify their portfolios and practice good money management. Paul Henderson has been trading for more than 13 years through many different market conditions. See him at http://forex-trading-tutorial.com