Placing Stops In Fx Trading

How to place stops in fx trading? Well, first of all let us ponder over the question, why do we want to get out of that trade?

There can be 2 reasons for placing stops in fx trade. First, the market tells us that our intrinsic view or Directional Assessments itself was wrong. Or second, we think we can make a better position at a better level than the previous one. Whatever the reason, the difficult part about placing stops in fx trade is that it requires us to have a well founded strategy and to choose our Entry much more carefully than we tend to do, in accordance with that plan.

There are many different ways for placing stops in fx. Take a look at the following observations as they relate to long term trend following.

1. Support and resistance

The good old fashioned support and resistance is a good way to place a stop. For example, while trading a breakout and if you think it’s valid the stop is behind the breakout point.

2. Do not move a stop too soon

Most traders are in the habit of trailing stops for locking in profits. But this is a critical mistake even the experienced traders make. Due to the volatility and reactions to the major trend, they are simply seen to place a stop, thus ending with marginal profit and missing the big trend.

3. Try not to use indicators for placing stops

Traders are advised to use momentum and other indicators for entering trades and calculating price strength, but hey should avoid using them for stop placement. For example, the stochastic is great as price indicator but one should always use chart support and resistance first. Similarly, Bollinger bands help define volatility and value areas. They should not be used for placing stops in fx trade, Resetting stops every day would mean incurring huge losses.

The fact remains that stop placement in fx is perhaps one of the hardest parts of trading. We have only touched on the subject here There could be many more other ways there.

Let’s do away with a couple of myths about placing stops in fx now:

a) Fx brokers hunt stops

With trillions of dollars being traded each day, no broker is big or strong enough to move the market and pick off your stops. One is simply a subject to market movement and the volatility that is inherent in trading forex markets.

b) A tight stop is better

This is completely false and not necessarily so. You don’t have less risk while trading with a tight stop in a short time frame. Volatility can be totally unpredictable in short time frames too.

To sum up, all we can say is that while placing stops in fx trade, if you are long term trend follower, have confidence to keep the stop back and take dips in open equity. This is the only way to hang out there. Get used to the feeling, for its not so nice. One needs lots of discipline. Keep your eye on the big picture and it will be worth it in terms of profit.