Use your Forex Stop Loss,
|
Due to the normal volatility of the Forex market, any system that requires a tight stop loss (usually part of a dangerous highly-leveraged position) is likely to result in being stopped-out of the trade.
If you are in a position with no more than 3% to 5% of your capital at risk, you should be able to play the position within about a 200 pip range. If you have done your homework, you should be on the right side of the trend, so when considering your Forex stop loss, fluctuations should be expected.
Your strategy needs to include a plan for dealing with prices that are moving against you. The ability to scale out of a position should be used before taking a hard stop loss. Often the "dip" is just a pothole on the trend's path and if you can play it as such, chances are a profit will be the end result.
Unlike stock prices which can go to "Zero" Value, Currency Prices Fluctuate Around an Average
Determine ahead of time what your loss tolerance is and start taking action before the price reaches that point. Be sure a loss really is a loss before you take it... we are in business to take profits, not losses.Unlike stocks, currency prices can't go to "zero" value. They fluctuate around levels determined by the market. If you had deep enough pockets, you could probably wait for the prices to come back to a previous level and never have to take a loss, but the reality is the price may take years to come around again.
Provided you are playing within the range of the past month or two, you are reasonably safe to expect a 200 to 300 pip range within a month. Plan your trade in this manner and most often the dips can be managed and stop loss orders avoided.
Your initial stop loss should be placed about 10 pips beyond the nearest support or resistance level you are working from. If this level is hit, there is a reasonable risk the trend may be reversing and you should take the appropriate action.
Always remember... if the reason you entered the trade in the first place no longer exists, you probably should exit your position. No one can predict the future and anything can happen, so allow for the unexpected in your trading system.
Click here to return from this Forex stop loss article to the Forex Strategy main page.