Stop Losses in the Forex Market

By Arkaitz Arteaga

Stop Losses (SL) are a necessity to any trading system. They can help a trader prevent maximum losses. It is recommended by all financial institutions, brokers and mentors that every trading system have a SL rule in place. There are a list of basic guidelines that most brokers would recommend any trader to use when it comes to SL.

Firstly, always analyze the market environment before placing a SL because no each trade has the exact same point where a SL can be incorporated in. This is to ensure, that the SL is kept in the exact point that best suits each trade. Always have a pre-determined profit margin before placing a SL. This allows you to know exactly where you should place your stop loss, so you can achieve your pre-determined profit margin. Stop losses should never be placed near the existing price. Lastly, the stop loss should not be place too far either, that it become inconsequential to the trade.

There are some basic ways in which to determine the best stop loss point. Firstly, when performing technical analysis, specifically Parabolic SAR, you can either use ten pips on top of the parabolic SAR dot as a stop loss point or ten pips below the parabolic SAR dot as a stop loss point. . However, if the stop loss point if quite a distance away from the point you wish to come into the market, its advised you don't place the stop loss point there. Instead , a stop loss point can be placed either on top of the day before's high and low or below the day before's high or low.

Another way of determining the best stop loss point is by using moving averages. Again placing the point on top of the moving average by ten pips, or below the moving average by ten pips. Bollinger bands can also be used. Again either place the point above the band by ten pips or below the band by ten pips.

By following the guidelines mentioned above, determining the exact point where a stop loss can be placed is possible. As well as that, the placement of the stop loss will ensure the reduction of loss any trader can encounter.

This article has explained the benefits of using a stop loss. As well as that, the ways in which to determine where a stop loss point can be placed have been discussed. This includes the various technical analysis traders use, and the ways in which they can use that to determine the best point.

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