Financial market movements are complex and unpredictable, and a stop loss (also known as a stop loss order) is a tool that helps investors avoid excessive losses in forex trading.
What is stop loss?
If Take profit is an order used to determine the point of taking profit, then Stop loss is an automatic stop loss order to help investors minimize risks when the market moves against the original trading trend.
Example: You sell the USD/EUR currency pair at 1.2560 and plan to place a stop loss order about 70 pips away from the place of order at 1.2630 pips. At this time, if the price turns up to the stop loss of 1.2630, your order will be automatically closed immediately to reduce losses.
Meaning of Stop Loss
As mentioned, Stop loss is very important in investment. A good investor will never skip Stop Loss in each of his trades. Because it has many benefits, such as:
Minimize risk when the market goes against the trend that investors predict. From there, limiting the situation of burning accounts for traders.
Help investors eliminate the psychological factor completely. In some cases when the price goes against the trend but investors expect the price to go up to recover the loss. But the price going down will make you lose even more. Stoploss will help you to eliminate this mentality and automatically close the order when the price reaches the set point.(Read more :scalping strategy)
Stop loss will automatically close the order when the price reaches the preset point. From there, it helps investors manage transactions, without having to spend time monitoring the market to cut losses.
How to calculate stop loss in forex
In order to invest and trade effectively and earn profits, investors need to know how to calculate a reasonable stop-loss set point. Specifically, to calculate Stop loss, investors can do the following:
Using technical analysis tools such as technical indicators , price patterns, candlestick patterns, etc. will help investors find a reasonable take-profit and stop-loss point.
– If investors trade according to news, they can rely on one of the following 2 ways:
Based on the total available capital: You can calculate the stop loss by 1-2% of the total capital you have. This is the most basic way to set stop loss for traders who are not familiar with market analysis.
Based on market volatility: If the market is volatile then set a large stop loss size. On the contrary, if the market is quiet, you should place the Stop loss close to the order point. To be able to determine volatility, you can use the Bollinger Bands indicator.(Read more : CFD Trading)
How to properly place a stop loss order
A professional investor will never ignore a stop loss order. Right from determining the right place to place the stop loss, it shows the level and level of the investor. To properly place a stop loss order, we do the following 5 steps:
Step 1: Determine the trading position
Step 2: Determine stop loss and take profit on the trade.
Step 3: Determine whether the R:R ratio is within the allowable range. If the R:R ratio exceeds the allowed level, make another trade.
Step 4: Determine the order volume
Step 5: Place orders according to the criteria set out above
Step 1: Determine the trading position
According to the chart above, we see that the price is forming in an uptrend. The EUR/USD currency pair formed a bottom and a higher high than the previous low and high. This is a bullish channel.(Read more : effective swing trading strategy)
When the price touches the price channel creating a new bottom, the uptrend will continue. At this point we will place a buy order at the point the price touches.
Step 2: Determine stop loss and take profit on the trade.
– Take profit will be at the upper trendline of the price channel, 440 pips away from the order entry point.
–Stop loss placed below the order place and below the 2nd bottom is 100 pips. If the price falls below this bottom, the channel is broken, so the process of determining the upper coin is no longer valid.
Step 3: Determine whether the R:R ratio is within the allowable range
The current R:R ratio is 1: 4.4. This is a good deal rate.
Step 4: Determine how much the investor will lose if the risk occurs
If trading with $20,000. For each trade order, if there is a risk, the acceptable level is 1%, which is $200. If we buy the above EUR/USD currency pair with a stop loss of 100 pips, we define the trading volume as 0.2 lots
Step 5: Place orders according to the criteria set out above.
According to the above calculations, we apply the above currency pair example with a buy order of 0.2 lots at 1.0570. Stop loss will be placed at 1.0470 (100 pips) and take profit at 1.1010 with 440 pips.
Stop loss mistakes to avoid
Although it is an effective tool to avoid risks. But if you make mistakes when placing this order, investors can fall into a worse situation. For example the following:
Do not place stop loss
Not placing a stop loss in a trade is common for two types of investors. One is not wanting to place, not interested, and let the market scan itself. If the loss is enough, proceed to terminate the order manually. Another type is that the investor is too confident in his judgment and can cut orders at any time. However, here, the risk in the transaction cannot be measured, if you do not set a reasonable stop loss, the situation of account fire will be very close.
Place a stop loss order too close
Placing a stop loss near will help traders limit risks. However, the situation of sticking to a stop loss also occurs more often. In many cases, the price has just closed due to stop loss and reverse direction right after that, causing investors to lose a significant amount of profit.
Set stop loss too far
Contrary to the first case when the investor sets the stop loss too far. In this case, it will be difficult to stick to a stop loss, but if it does, it is also the time when the account loses too much.
Move and drop stop loss
This action is like an investor trading but not placing a stop loss above. Many investors, although calculated, but feel unsatisfied, want to find profits when the market goes deeper, they will move the stop loss and drop it. However, the bottom line of the forex market, investors who want to succeed must know the right stop.(Read more : forex scam tricks)
Conclude
Above is all information about stop loss, hope to help investors understand what a stop loss is and how to place a stop loss order most effectively. Always remember if you want to be successful in forex you must always set a stop loss to manage your trades and minimize your risk!
