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How to correctly set Stop Loss when trading Forex?

 

 

In this post I will try to answer in detail a very important question for beginners, namely: what is stop loss in Forex? We will also consider how to set a stop loss when trading for an open position and what options are there for setting the correct stop loss.

So, Stop Loss (protective order) is a kind of "return point": such an order is given to the broker when you want to close your position when it reaches a certain level (that is, in the direction of loss). This is done without your participation: when a position becomes too risky, then in order to lose less, the trader places a stop loss order for it.

 

Usually, the question of how to set a stop loss causes a lot of difficulties for beginners: they do not understand what such orders are for, what factors their parameters depend on. However, there is only one key parameter here - the level of the final result for a specific trading system.

It is imperative to set stop loss when trading on Forex (especially for novice traders), without them the probability of the deposit draining greatly increases: sooner or later, but this will happen if you trade without correctly set stop losses.

 

How to place a stop loss order in the MT4 terminal?

In the MetaTrader 4 trading terminal, the stop loss level is set when an order is created to open a position (regular or pending order). For example, you want to open a Buy position at the market price in the market and place a protective order at a distance of 50 points. To do this, you click on the "New order" button, in the "Stop Loss" field, set the required price level below which the open position can no longer go.

In our case, the current purchase price is “1.3393”, and the stop loss should be set 50 points lower, ie. at the level "1.3343". After that, as set, press the "Buy" button, as a result, the order will go into execution and the position will open in the desired direction and with the set protective stop.

There are several optimal options for how to set the correct stop loss and at what levels it is better to do it. Let's consider them in order.

 

Methods for placing a stop loss order for open positions

  1. The first thing to consider is what currency pair you are trading and its volatility in the Forex market. For example, EUR / USD traverses approximately 70-100 points per day, and here it is important to set the correct stop loss so that it does not get caught by random noise (that is, a candle shadow or a short-term jump).
  2. In addition, a protective stop loss can be set at the so-called psychologically important levels (that is, between two extremes) - not close, but not far, taking into account the current price position and the volatility of the selected currency pair. For example, for EUR / USD these are prices - 1.5000, 1.4500, 1.4000, 1.3000, etc. whole numbers, while placing a protective order at + \ - 15-20 points from these levels. Traders pay special attention to psychological levels, as the price very often bounces off them.
  3. If you do not know where and how to set stop loss, set it on support or resistance lines - this is practically the same as the levels of the last local highs and lows (or extremums of the previous day). You just need to look at what timeframe you are trading on now. This is the most standard and effective way to place stop losses.
  4. A protective stop loss order can be placed on the moving average indicator (Moving Average or MA - the average price indicator of a currency pair). To do this, first we put the Moving Average indicator on the chart, set the period for it 480 (for the H1 timeframe). If the volatility changes, then the MA line chart will also change (the moving average will either rise or fall), so it is imperative to track volatility.
  5. Also, a protective stop loss can be set at additional levels from the moving average - for example, +/- 10-15 points, depending on the position you enter (buying currency or selling - Buy / Sell), also at important levels of the Fibonacci number sequence (these are levels 55, 89, 144, 277, etc.), which can also be added in the indicator parameters of the moving average

 

So, to summarize, in order to set the correct stop loss when trading on the Forex market, be sure to take into account the above rules, analyze the current situation and place this order where placing it will bring the most optimal final result, and preferably at a long-term distance.

 

 

 

 

Published on: 9/16/20, 6:32 PM