By Warren Seah – A stop loss order will automatically close a trade at a set level in order to prevent further losses. If a buy order has been placed, then the stop level is set at a price that is lower than the buying price. On the other hand, if a sell order was triggered, then the stop will be placed above the selling price.
A general rule is that the exit strategy must coordinate with a trader’s entries and his overall trading system. For trending system, it is required that the trader set a bigger stop loss level which allows more room for the trade to breathe. If it is a contrarian system or breakout system, a small stop loss should be set so that trade will exit immediately if it is a bad trade. Thereby, traders’ loss will be limited in such forex trading system.
There are a variety of stops that one can incorporate into a system.
1. Initial Stop This is the first stop set at the beginning of the trade. This stop is identified prior to entering the market. It is used to calculate the position size of the position at which to trade and this is also the largest loss a trader will take in the current trade.
2. Trailing Stop Develops as the market moves. This stop enables the trader to lock in profit as the market moves in the favor. Trailing stop ensures that the stop loss follows the price movements closely as the trend develops. This is to prevent any sudden market movements from taking out profits should the trend starts to reverse.
3. Two Bar Trailing Stop This is used in a trend if the market seems to be losing momentum and a reversal is anticipated.
4. Moving Average Trailing Stop Moving average indicator is most common used for trailing stop loss.
5. Average True Range Trailing Stop Also called ATR indicator. This indicator is mostly used by turtle traders or trend following traders to determine market volatility and place their stop loss away from volatitily and protecting their profits at the same time.
6. Parabolic SAR Trailing Stop Another indicator widely used for placing your stop loss.
6. Channel Trailing Stop Also a commonly used trailing stop technique for turtle traders or trend following traders.
Is Your Stop Loss Selection Based on Market Dynamics?
It means that have you taken in to account market conditions that will tell you how much room you need to give the trade to breathe so that your trade will not be exited due to market noises and repeatedly stop out? There is no perfect stop loss strategy but the most ideal stop loss strategy has to be discovered and worked out by the trader via back testing and forward testing.
About the Author
Warren Seah
Forex Trailer is a fully independent software EA which manages traders’ positions in the foreign exchange market. Forex Trailer ensures they are closely monitored to close for optimum profits. It works by managing the trader’s stop loss level or take profit levels and thereby locking in profits for the trader.
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