Currency prices in the forex markets are always jumping up and down. Forex markets are volatile most of the time. In the short term, you will only find noise in the intra day forex market. This makes it difficult for new day traders to know how to put a stop loss. Most of the time, prices in forex markets jump 10-20 pips for no apparent reason.
This becomes frustrating for many new day traders. Most constantly find their stop losses being tripped due to noise even when the rates are going in the anticipated direction.
Most of the new day traders use a static 10-20 pip stop loss. This is an arbitrary choice many traders make. How about using a trailing stop? If you place the trailing stop loss too close; you will find your stop hit too early. And if you place it too far; you will have to forgo potential profits if the price retraces later on.
You should place your stop loss on dynamic levels. Most of the professional traders do use stop loss but mostly place it on their computers making them invisible to their brokers.
Stop hunting is something the brokers are continuously doing. If a broker finds many stop losses at a particular price level on his price feed; he can easily trip them using a momentary blip in the price. You cant even complain. The momentary spike happened due to a sudden large transaction in the market.
Do you know this many professional forex traders only use a stop loss in their mind. They plan entry/exit for each position. Keep on monitoring it changing, the stop loss in their mind as the rate fluctuates. When they reach the desired outcome, they close the position. With experience, you will also learn to do the same.
Using dynamic stop losses such as Moving Averages, Bollinger Bands, SARs etc is a better way to reduce your risk while allowing the markets to do what it wants.
The more experienced a trader you will become, the more you are going to realize that placing fixed stop losses actually hurts you more emotionally, psychologically and profit wise than help you.
You should not try to trade before or after a major economic news release. You should not try to place stop loss close to or at round numbers. And you should also not try to trade in times of thin liquidity in the currency markets.
You should understand that your broker can and will use stop hunting to take out your positions using noise in the market as an excuse. Forex trading and casinos have many things in common. You should learn how to beat the markets and the brokers only then you will become a successful forex trader.
This becomes frustrating for many new day traders. Most constantly find their stop losses being tripped due to noise even when the rates are going in the anticipated direction.
Most of the new day traders use a static 10-20 pip stop loss. This is an arbitrary choice many traders make. How about using a trailing stop? If you place the trailing stop loss too close; you will find your stop hit too early. And if you place it too far; you will have to forgo potential profits if the price retraces later on.
You should place your stop loss on dynamic levels. Most of the professional traders do use stop loss but mostly place it on their computers making them invisible to their brokers.
Stop hunting is something the brokers are continuously doing. If a broker finds many stop losses at a particular price level on his price feed; he can easily trip them using a momentary blip in the price. You cant even complain. The momentary spike happened due to a sudden large transaction in the market.
Do you know this many professional forex traders only use a stop loss in their mind. They plan entry/exit for each position. Keep on monitoring it changing, the stop loss in their mind as the rate fluctuates. When they reach the desired outcome, they close the position. With experience, you will also learn to do the same.
Using dynamic stop losses such as Moving Averages, Bollinger Bands, SARs etc is a better way to reduce your risk while allowing the markets to do what it wants.
The more experienced a trader you will become, the more you are going to realize that placing fixed stop losses actually hurts you more emotionally, psychologically and profit wise than help you.
You should not try to trade before or after a major economic news release. You should not try to place stop loss close to or at round numbers. And you should also not try to trade in times of thin liquidity in the currency markets.
You should understand that your broker can and will use stop hunting to take out your positions using noise in the market as an excuse. Forex trading and casinos have many things in common. You should learn how to beat the markets and the brokers only then you will become a successful forex trader.
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading options and forex trading. Download Forex Scalping Cheat Sheets. Discover The Best Forex Signal Service!
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