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How to Protect Your Trades with a Stop Loss?

1:14 PM Nov 18, 2019
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Forex trading

Let's be honest, you cannot stay round the clock looking at your charts. Sooner or later you will have to step away from your screen. And at this moment the market might move against you and eat your whole capital in one transaction. How to protect yourself and your investment?

It’s simple. Always use Stop Loss. This is probably the basis of any risk management system. With the competent use of Stop Loss, you will trade with more confidence and protect your investment.

What Is Stop Loss and How to Set It

In simple words, Stop Loss is an order to automatically close your position when the market reaches a certain level. This option is intended to reduce potential losses if your trade is unsuccessful.

To set Stop Loss on an open position, follow these instructions:

  1. Right-click on your position and select “Modify or Delete Order” in the drop-down menu.
  2. In the pop-up window specify the desired Stop Loss level in pips or manually enter the desired price.
  3. Click the “Modify” button. After confirmation, you will see the Stop Loss level in the details of your position.

Where to Put the Stop Loss Level?

All traders have their own approach. Some set Stop Loss 50 or 100 pips away from the entry price. The others make their decision based on chart analysis.

In the second case, it always depends on your trading strategy:

  • Trading on pin bars - You put Stop Loss right above or below the pin bar
  • Trading on inside bars - You put Stop Loss around the maximum or minimum price of the inside or mother bar

Stop Loss Strategies

Everyone chooses the option that suits them best. Some traders even constantly monitor their trades and slowly trail Stop Loss as the market moves. This approach has the right to exist. But today we will look at three main strategies that most Forex traders use:

  1. “Hands Off” or “Set and Forget”
  2. Breakeven Strategy
  3. 50% Stop Loss

“Hands Off” or “Set and Forget”

Among all strategies, this one is the simplest and most understandable. Here you set Stop Loss according to your trading strategy and no longer move it. This method has several advantages:

  • Keeps Stop Loss at a suitable distance. Looking at the market, you might want to move the level and as a result, your trade might close too soon.
  • The strategy is easy to use. You set the level only once and you no longer have to make new calculations or do an additional market analysis.
  • It eliminates the emotional aspect. If you don’t return to your Stop Loss, you don’t make additional decisions based on your feelings

Breakeven Strategy

The most important thing for most traders is the lack of losses. They don’t even care how much they earn. The main thing is not to lose anything. So that’s where the Breakeven strategy comes from. Traders using this method wait until the market moves a few points, and then set Stop Loss exactly on the entry price. This way they can make sure that they don’t lose anything. Here are a couple of advantages to this approach:

  • You risk nothing at all
  • Even without analysis, you know where to install your Stop Loss

No risk seems very attractive. Still, if you want to make constant income on Forex, then you should focus on the profit that you can get, not the number of losses.

50% Stop Loss

This strategy is much more complicated than the others, as it requires additional analysis in the process. The essence of this method is as follows:

  • You set Stop Loss at the beginning of trading
  • After some time (usually the next day) you analyze the current market situation
  • You trail Stop Loss 50% closer if the trade moves in a favorable direction

For example, if you set Stop Loss at 100 pips from the entry price and the price is clearly moving in your favor, then you can move it by 50 pips and halve the estimated losses.

This method has several advantages as well:

  • Your potential losses will be cut in half
  • Your trading will be based on price action - and this is always the best approach
  • It still leaves 50% of the initial Stop Loss for further price fluctuations

The amount of 50% is not a guide to action. It is best to assess the market situation and move Stop Loss based on the highs and lows of the inside bars and pin bars.

Final Words

There are several ways to set Stop Loss and even more ways to trail it. In order to reveal the topic of a competent Stop Loss trailing, we’ll need a whole new article. So I will tell about this next time.

In the meanwhile, you should remember a couple of important things:

  • Using Stop Loss is a must. Otherwise, you can’t control your risks without leaving the screen and you cannot use any strategy other than scalping.
  • If the market is highly volatile, monitor your trades. During a gap, Stop Loss will not be able to protect your position, since the indicated price will not appear on the market. Be careful.

That's all. I hope that now you understand how to protect your investment in the easiest way. Next time, I will tell you how to trail your Stop Loss thoughtfully.

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trading mindset beginners novice traders trading strategy forex trading trading plan broker losses forex mistakes trading habits women in Forex female traders risk management profit trading instruments pairs price advantages of forex leverage FXCL investments copy trading advantages of Forex social trading professional traders trading psychology demo trading buy/sell bid/ask spread Metatrader 4 market analysis technical analysis fundamental analysis trade trading platform Forex trading novice trading dealing with losses charts timeframe indicators MetaTrader 4 trading routine support level resistance level trend low-hanging fruit stop loss loss trading history long-term goals open trade close trade daily charts swing trading intraday trading scalping trading setup Forex traders bullish bearish resistance support MA 200 trend trading professional trading EMA EA daily chart weekly chart Forex news highs lows account type cent trading Mini Micro Cent Partnership commission fees trading terms Stop Loss news trading economical calendar major news release currency pair currency rate national currency trading journal trades profit/loss emotions news release positions size Expert Advisors platform trading robot cryptocurrency volatility day trading position size lot account types cent accounts Mini account ECN Copytrade ECN accounts swap-free minimum deposit order execution liquidity providers demo accounts real account low-risk trading EUR/USD economic calendar majors cross-currencies exotic currencies base currency quote currency quotes bid ask Brexit United Kingdom European Union GBP Euro GDP WTO price levels moving average 4-hour chart 1-hour chart bulls bears false breakout cross-currency USD price action pin bar trading inside bar trading hands off breakeven stop loss 50% stop loss pin bar high-frequency trading position trading swings breakout strategy trading style Entry order Take Profit hammer shooting star inside bar pinocchio bar head and shoulders harami risk to reward ratio trading calculator trader’s age emotion control