How to set a stop-loss
A stop-loss order is the primary way to reduce losses in Forex trading. It's essentially an order to
forcefully close an order if losses reach a certain threshold. This approach prevents your deposit from being completely wiped out.
The question of "How to set a stop-loss" is on the minds of every beginning trader, so in this article I will try to describe the solution to this problem in more detail.
There are several options for setting a stop-loss order, all based on different principles, and each trader chooses the most suitable one for themselves.
Professionals claim that the market situation should be the basis for placing stop orders, but there is also an alternative.
So let's look at the most common ways of setting stops, depending on trading conditions.
How to set a stop loss on the market.
In this case, the main indicator on the basis of which the stop-loss amount will be calculated is a correction or rollback against the main trend.
When analyzing any currency pair chart, fluctuations in the exchange rate immediately catch the eye. Our goal is to ensure that the order doesn't close prematurely as a result of a pullback.
The correction amount is determined visually or by constructing a channel; the stop-loss point should be several points below the calculated minimum. This means the order is triggered when the price channel breaks out against the trend.
For example, if the price rollback on your time frame is 20 points, then the stop loss should be no less than 25.
This is, so to speak, the most correct option, but one should not forget about monitoring the market situation; if it changes, you can close the deal earlier, and if you make a profit, on the contrary, move the stop loss to the break-even zone.
Based on the amount of the deposit.
This method is the safest, allowing you to maintain your planned level of losses. Unfortunately, however, the size of your deposit doesn't always allow for this option.
The recommended loss per unsuccessful trade is between 2 and 5 percent, but if you're trading 0.1 lots with a $100 deposit, you'll have to set your order at just 5 pips. This is simply not feasible, given the broker's spread.
Therefore, in this case, we adjust the level of losses based on our capabilities and market dynamics.
In a fixed amount.
This approach is primarily used by novice traders, but surprisingly, it sometimes yields good results. The order size is simply set at random, for example, 15 pips, and the take profit is set simultaneously, but it should be at least one and a half times larger, for example, 25 pips.
If you guess the order size correctly, at least half of the trades will close profitably, resulting in twenty open orders bringing in 100 points of profit.
A rather controversial option, but it also has a place to be, the main thing is that the size of the installed stop is not excessively small.
Using special scripts.
Quite a few scripts have been created that allow you to calculate stop losses based on specified parameters:
- Automatic stop loss and take profit - http://time-forex.com/skripty/automatic-stop
- Stop-loss movement script - http://time-forex.com/skripty/stop-loss-move
Setting a stop-loss correctly is already half the battle, so to choose your option, try all the methods on a demo account and make adjustments if necessary.
