To avoid incurring losses in Forex Trading, a Stop Loss order is utilized to cancel a trading position whenever it hits a certain price percentage/point. The stop-loss order, as its name implies, limits the trader’s losses in the event that a trade fails. This stop-loss order is regarded as a critical component in risk management, which is why many trading books, webinars, and experts recommend and highlight its use.
However, the precise placement of stop-loss orders is also critical in minimizing the loss. Placing a stop-loss order incorrectly will cost you a lot of money. Here are some things to keep in mind while establishing a stop-loss order, as well as how to maintain it.
Not Determining Stop-Loss in Advance
It is a good practice to set the stop-loss in advance. This should always be done when you have decided your target and entry price. This is very beneficial because it removes the emotional bias that may influence your decisions.
Stop-loss Based on a Guess
Determining the stop-loss should always be based on technical analysis and not just some guess that you think will work. The market moves because of a lot of factors and not how you want it to. The financial market will continue to move based on overall market factors and not doesn’t care about what your set prices are.
Constantly Changing Stop-Loss
Remember that stop-loss is set in order to prevent big losses. If you keep moving the stop-loss, it will just keep incurring losses which will eventually pile up and turn into a financial trading mess. Stick to your plan. When the stop-loss is filled, go back to your strategy and follow your rules on what you should do next, and don’t just re-enter the market immediately with hopes of getting the money back.
Having Too Wide Stop-loss
A lot of traders commit the mistake of setting their stop-loss to avoid hitting the stop-loss price. The problem with this is that the risk to reward ratio gets too skewed and will result in a few trades.
Setting the Stop-Loss Where Everyone Else Sets It
A lot of traders base their forex decision on how to enter and exit the market through technical analysis. If the majority are setting up their stop loss on a specific price, it’s best that you set up yours a little higher than that to minimize potential losses. Every pip counts. Why wait for the trend to reach where the majority sets their stop-loss in if you can save some pips by setting yours a little higher than their predicted price.