The Definitive Guide to Choosing a Forex Stop Loss Strategy

If you had been trading from the daily time frame, your stop loss would likely be at least 50 pips away from your entry. If structure does not hold then hedge trade sequence is initiated and so on and no extra risk is taken, as that is where one would normally place a stop loss. Perhaps this is because the trader subconsciously sees the stop loss as a safety net. It shows by example how to scalp trends, retracements and candle patterns as well as how to manage risk. A Forex loss bigger than the one planned can occur.

Before we look at a no stop-loss Forex strategy, let's consider a few things. In a normal FX market, a stop-loss acts as intended. For example, if you buy at $50 and set a stop-loss order to $, then it restricts your loss to 5%.

Increase Revenue or Decrease Expenses - Which is Easier?

Most trading strategies will hold more than one trading position. So given that most markets are correlated to some point, does it make sense to manage stop losses independently?

This is ordinary hedging. With some strategies , hedging can be a safer and more reliable way of protecting downside losses than stop losses. Some say that trading with stop losses leads to lax analysis and sloppy trading. Perhaps this is because the trader subconsciously sees the stop loss as a safety net. In the same way that riding a bike with safety stabilizers could make you over-confident as well as more prone to take uncalculated risks.

The trader without stop losses might be more prudent in the choice of trade, money management , and the control and monitoring for the account. This final point is the killer. When the market collapses and liquidity dries up — something that happens from time to time — a trade will exit at the first price it happens to hit. That could be many percentage points away from a stop out level, potentially leaving you with massive losses.

Here are some alternative ways you can protect downside losses without using broker stop losses. It comes with caution though. Omitting stop losses should only be done with full consideration of the risks and after careful testing. With dynamic stop loses you need a piece of software to keep watch on your account such as an expert advisor.

The software continually checks the floating losses on open trade positions. When a loss-limit is reached, one or more of the positions is automatically closed. This limits downside losses on the account. Essential for anyone serious about making money by scalping. It shows by example how to scalp trends, retracements and candle patterns as well as how to manage risk. It shows how to avoid the mistakes that many new scalp traders fall into.

Dynamic stop losses allow for much more flexibility than broker-side stops because the software can apply any logic that you want. Hedging means that one trade position is covered by another. The difference between the two determines the profit — but once both trades are in place the profit or loss is locked at that amount.

With a more practical hedging strategy a trader would use different currency pairs as well as other instruments to create a basket that has lower volatility with improved risk-adjusted returns. Ideally they will also use a VAR calculator to estimate the account exposure. This checks the overall effect of hedging between each position in the account. Options can be a great way to protect downside losses in place of stop losses. They do require a bit more planning but once mastered can offer at least as much protection.

With this approach the trader buys out of the money call or put options that will cap the downside losses on one position or even on the entire account. An out of the money put option works like a wide stop loss on a long position. While an out of the money call option works like a wide stop loss on a short position.

But options do have a cost even though by using out of the money options this cost is relatively small. In a worst case scenario if your positions go south the options will pay out and protect against the downside. A scalper for example would look to make only a few pips on each trade.

Each position may only be open for a few minutes or hours. During this time the trader is monitoring it closely and is ready to react if it goes into the red. That is simply to hold a small reserve balance in your trading account. Not surprisingly this is not recommended. That means that your broker may close out your trades at prices that are highly disadvantageous to you. That may also attract penalty fees. Stop losses might be the right choice for some strategies but not others.

As a final point if your risk control relies on your own systems, it is generally best-practice to place wide broker-side stop losses anyway. There are three parts to a trade: A Forex loss bigger than the one planned can occur. For Forex traders, it meant they can easily buy the pair with a stop loss order at the 1. It worked like a charm. However, when the SNB unexpectedly dropped the peg, mayhem started.

Neither a Forex stop loss nor a take profit. Hence, the stop loss order at 1. This is not random. Part of the regulatory process, traders must be informed about the risks associated with trading the currency markets. However, the SNB example is extreme. In fact, it was unprecedented and threatened the retail trading industry. Imagine one retail trader having one lot or more on the long side.

And then, in a blink of an eye, the market dips almost four thousand pips. And, even more importantly, the broker was covered. There was no market. The next thing the brokers did was to go after their clients.

The retail traders were forced to come up with the difference. It turned out it was a smart move. A client lost meant no more future revenues. But, not all brokers did that. The retail traders that needed to cover the losses faced a tough reality.

Why should traders still use Forex stop loss orders? The answer comes from the unprecedented of the situation. As such, embracing losses is part of the process. This is a problem for retail traders. When coming to the Forex market, retail traders have unrealistic expectations. I mean, they all go through the same process.

Firstly, they look for the perfect trade. That is the trade that repeats on and on. Moreover, the trade that always wins. After spending a lot of time and money to find it, traders move to the next step. They combine all possible technical indicators in search of the holy grail. The way to do that is to incorporate the Forex losses in a money management system. Believe it or not, when the market hits a stop loss order, good things happen too.

Free margin means new opportunities. Traders have margin now for other trades. A door closed, another one opened. Before thinking of the reward, traders must define the risk. Managing the risk is crucial. And, to do that, risk-reward ratios help.

A risk-reward ratio represents the key to profitable trading. It incorporates a Forex stop loss as part of the trading strategy. Moreover, it gives traders control over the trading process. When both the risk and the reward are well defined, traders can focus on finding the best trades possible.

As such, a stop loss order brings discipline in a trading account. A proper risk-reward ratio for the Forex market is somewhere between 1: It means that for every pip risked, the expected reward is double or even more.

Every trader experienced Forex failure stories. In fact, it is part of the trading process. However, the reason for a Forex failure goes hand in hand with a bad stop loss order. Or, even worse, with no use of a Forex stop loss. There are many examples in the retail trading world that show why a Forex stop loss helps a trading account. Now see how a Stop Loss order can protect your Forex trade. Below you will find a video example of a channel trade which does not go as planned.

The price was bouncing off the lower level of a bullish channel and I thought a new bullish impulse is on its way. However, the price broke the lower level of the channel and hit my Stop. The decrease was even sharper, meaning that the Stop Loss protected me from a bigger danger. Because a stop loss order is part of a money management system, its presence is mandatory. As a rule of thumb, traders should always have a stop loss order in place.

But, not everyone uses them. When the broker is a market maker, it does such nasty things. Statistically, they have better chances to make a profit. The stop loss order definition is straightforward. It stops the loss. Or, in plain English: Yet, it is difficult to pull the plug.

Especially when a trade unfolds. As such, the better way is to have a plan in mind. The Elliott Waves Theory is, perhaps, the most complex logical process in technical analysis. Traders count waves as part of identifying the right market cycle. As such, they divide the market moves in impulsive and corrective waves. The rules defined by Elliott allow placing a stop loss order. In other words, the level that invalidates a count is where the stop loss order should be.

According to Elliott, an impulsive wave is a five-wave structure. If the move that followed Mr. The start of the 1 st wave represents the stop loss order level. If the trade is part of a money management system with 1: Simply count the pips needed for the stop, then multiply the outcome with two or two and a half.

As such, traders find the right target. This is the most simplistic example possible. The Elliott Waves Theory is so complex and has so many rules that allow for tighter stops. In fact, Elliott traders have a problem. Yet, the theory gives great trading opportunities.

Initial Stop Loss Placement

This is a No Stop Loss Forex Trading Strategy.. Its just an idea that if you know how to code an MT4 expert advisor, you can follow the trading rules below and see if its profitable in the long term or not. The floor traders method with no stop loss system is a system that allows you to avoid the initial price spikes just after your trade entries by not placing a stop loss initially. This is what this trading system is really about. May 05,  · It can be done sort of. I have a $ working account with a broker. My margin per lot is $ So each time I enter a trade, I don't set a stop loss but I have a de facto "stop loss" of about 50pips until the margin call.


One of the first rules of Forex trading which are put persistently in the head of the trader is the obligatory placement of the Stop Loss in order to limit possible losses. There are no doubts that one of the most important qualities of . No stop loss Forex trading will be like going through a maze without a map for the exit. Although traders who are able to judge the volatility of the market to do trade comfortably, the other traders might incur losses. Sep 23,  · Hello everybody. Here below my trading account after almost 1 year, where I use Smalfi Method 21/1. The strong points of this strategy, which applies only on EUR/USD are the money management, the absence of losses (by not using the stop-loss) and ease of use: I use only pending orders, following fixed rules, and I manage .

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