Trading with stop loss is the most important part to minimise losses. Those who ignore the importance of stop loss are on a tough road in the forex market. But to become successful in this field without losing much money, you should know the way to place a stop loss correctly. Although the topic of stop loss is quite vast, in this article, I am going to give you a general idea about the crucial things to be kept in mind while placing a stop loss and target profit.
I will start this lesson with the stop loss placement. There are two reasons for this:
- All successful traders concentrate on the risk factor rather than reward. You need to check the risks and losses related to the position that is being planned to open.
- Before identifying the dollar loss, position size, etc.; your first focus should be on the stop loss.
An entire market structure is studied to place a stop loss which is a logical way to determine the point when the trade signal is no longer considered valid.
My main funda of playing in the forex market is “place and forget”. I start by studying the markets, setting a position and placing a stop loss; and then forget. But at the same time, I keep on analysing the price action. The only time when I exit the markets manually is when the markets start showing some convincing signals against my predetermined stop loss. Of course, in this case, it is logical to put in some manual work.
The behaviour of a Successful Trader
A successful trader studies the chart, identifies the stop loss, open a position and forgets. He does some manual work only when the price action shows signal against the open position.
The Behaviour of an Unsuccessful Trader
Mostly the emotional traders are the unfortunate one. They do not consider the price action and start panicking and manually exit the markets even if it shows a minute signal against their open position. Many unsuccessful traders do not understand the importance of stop loss and skip putting it. As a result, the markets keep on moving against their open position making them emotional. And finally, the broker closes the position.
We all know that the markets keep on moving up and down which means the stop loss should be placed at a point where the price gets some room to breathe. A professional trader places the stop loss at a point where the markets cannot quickly hit the point of a stop; but along with this, it should not be too far off. This is because while placing a stop loss, a trader must think logically and the point should be closest to the logical level. So, it is important to give space for the price to oscillate, but at the same point, it should be close enough to exit the market when it’s not behaving in favour. So each stop placement should be given time and thought as there is a fine line between a right and a wrong decision in the forex market.
I have seen many unsuccessful traders who place a stop loss too close as they think that this way they are trading a bigger position size. This is not the right way as instead of finalising the amount of money they want to make; they are placing the stop loss on the basis of surrounding market conditions and trading signals.
At the close of this part of the article, I just want to say that the stop loss should be placed on the basis of logic and not the position size. Placing it too close means opening a position for loss and that so before the trade even starts.