How to use a defensive stop-loss order and a trailing stop key to perfect your forex trading skills and avoid unnecessary losses.
On 23 June 2016, UK voters went to the polls to decide on the future of the UK in the European Union. As the day drew to a close, the results came as a shock to the UK - the European Union's second-largest economy - which had just decided to abandon the world's largest free trade agreement. When the markets opened, the pound had the largest current in its history. This is because, before the vote, most of the polls show a single victory for the European part. For some of the businessmen who predicted before winning the holiday campaign, June 27 was a good day for them. It was a difficult day for the majority who followed the turnout. The story was written about these traders who lost their entire funds by buying a pair with the pound as the base currency. The Brexit vote is a good example of how risky traders express themselves every day. To reduce the impact of this risk, experienced traders use a combination of different methods. For example, one adjusts their leverage ratio when expecting a large release. Others focus on opening smaller buildings while others stay out of the market during periods of high volatility.
Another common way to reduce risk is to use stop-loss orders. A stop loss is available on most trading platforms to help traders manage risk. It automatically stops trading when a trader reaches a certain level even if the trader is not present. By using a stop loss, traders can avoid being in a situation where a single trade erases their previous win.
The stop-loss order automatically exits the trade when the trader reaches a certain level even though he is not present.
How to keep stop loss
To set up stop-loss, traders should do a few things. First, they need to calculate their risk-reward ratio. This is a simple ratio that specifies who wants to lose the most money and who wants to make the most profit. While there is no sensation about the best risk-reward ratio, an ideal ratio for newcomers is 1: 2. In this, a trader is risking 1 USD to make a potential 2 USD.
To determine the ideal risk-reward ratio, experienced traders use a general formula that determines their winning rate. This formula assumes that the trader's winning rate will be maintained in future trades. The formula is: E = (1 + (W / L) × (P - 1)
Where: P is the winning rate, W is the average winning size and L is the average winning size.
Kathy Lien, the author of Day Trading and Swing Trading Currency Markets, advises traders to use two methods when placing stop-loss orders. In the first method, they should use the two-day lower method. In this, a stop loss of about 10 pips should be placed below the two-day low of their pair. For example, if the most recent candlestick low of GBP/USD was 1.1500 and the previous low was 1.1400, the stop loss should be set around 1.1390 ??if a trader keeps buying.
He recommends the second option to use parabolic stop and reversal (SAR). This is an indicator found on most trading platforms, including MT4. The indicator puts a point on the chart where the stop loss should be placed when the trader starts a long trade.
Other alternatives such as Fibonacci retracement levels, Bollinger Bands and other technical indicators are recommended. A trader needs to find a formula that works, tests it and applies it to their business.
New traders stop at the stop loss stage. Experienced traders use the concept of a trailing stop loss to minimize losses and maximize opportunities. In it, no stop loss is placed on a single level. Rather it is placed above a certain percentage below the market value of a property. If the trade goes ahead, it pulls the stop loss, thus protecting the gains that have been made.
This idea is important because at a given time the profitable trade will be reversed before it hits the profit level, thus eliminating profits.
Final Thoughts on Stop Loss Orders
Traders must have a stop loss whenever they open a trade. If the trade goes in their favor or big unexpected news arrives, it helps protect your accounts. In the Brexit scenario described above, most traders believed that money could be won if they lost the stability aspect. Of these, the losses of traders with stop loss were minimal. You can get some good ideas from here