Considering the Forex market’s high volatile nature, experts have introduced various measurements to allow traders to manage risk volume. Learning details about these measurements, their properties, and the most favorable methods to apply them is obligatory for all aspiring traders.
What is a Stop-loss?
A stop-loss order is a way of security selling which one places with his broker. This convenience is provided to give investors an opportunity to reduce the possible loss amount. Some platforms may offer extra flexibility in positioning it by not making it mandatory to enter a trade. However, some brokers make this option obligatory to define before anyone starts a transaction.
From the order’s given characteristics, it is highly helpful for anyone who cannot sit before his monitor screen all day long and analyze the market.
Why is Stop-loss Important?
To realize the necessity of placing this order, you can look at its definition. The sole purpose of this instrument is to mitigate the chance of losing more in future conditions. There are several perspectives from which one can define the nature and objective of a stop. But the most straightforward and crystal clear one defines it as a risk management instrument that is highly beneficial to the confused and mobile busy investors.
By placing this order, one just determines a point which represents the highest horizon of his loss tolerance. It means he cannot afford to lose more money if the price movement continues to drop under that point. Thus, he not only establishes control over the trade but can trade with less fear.
1. Static
This is the most typical way traders deploy a stop. Static stops are those points that don’t vary until the movement goes below its level. The cardinal benefit of such stops lies underneath the comfort they provide to the market participants. They don’t require extra attention, and they help investors to advance further with a 1:1 loss to profit ratio. Remember the fact, risk to reward ratio is the most important factors in stocks trading. Try to find trade setups with higher risk to reward ratio as it will improve the chance of winning more money.
2. Trailing
This is just a more advanced version of limit-risk order. Trailing stop-loss has been developed to further up the concept of stops and give people more money management feasibility. Such stops will adjust themselves with the price movement for the traders’ favor, allowing them to lessen further the effect of losses.
For instance, say an investor holds on a long position on a currency pair at 1.3300. He set the exit at 1.3200 and target-profit at 1.3400. For a breakout, if the movement reaches 1.3350, he might need to adjust his stop-loss and to set it at 1.3250. It is an example of the trailing stop-loss. It gets set after reaching the initially defined price, further protecting the money the trader earned from the breakout.
3. Insider and Pin Bar Trading Strategy
A pin bar exit strategy is when anyone placed the exit behind a pin bar’s tail. He doesn’t need to think about the nature of the pin bar. If the price , it is a clear indication that the method is not robust enough.
In comparison, the inside bar method gives a trader two options to choose between as his exit level. One is behind the high of the inside bar, and the other one is behind the low. However, the safest action is to set it behind the high or low of the mother.
This inside bar method is safer than the pin bar for it provides more buffer areas between the entry and the exit level.
There are several other strategies for stop-losses and all of them well-covered by a learner before his entrance into the trading market. This article has featured the most basic ones just to kick off your stop-loss learning journey.