Learn To Use Stop Loss

Discover a revolutionary new Forex Robot.Many forex traders find it hard to follow simple risk management rules while trading. Many times, currency traders turn winning positions into losing ones and find solid trading strategies result in losses instead of profit.Read about L.M.T Forex Formula.

Regardless of how knowledgeable and intelligent a trader maybe about the markets, their own psychology and emotions will cause them to lose money. What can be the cause? Are the markets so enigmatic that only a few succeed in making profit?

Actually the likely cause is that there are common mistakes that many traders commit in their trading. The good thing is that the problem while it can be emotionally and psychologically challenging can be grasped and solved.

Most traders lose money because they fail to understand and apply risk management rules in their trading methods. Risk management means knowing how much you are willing to risk and how much you are looking to gain in a trade.

Without understanding risk management, many traders hold onto a losing position for a long time and take profit on a winning position far too early. The net result is that traders end up with more winning positions than losing positions. But their account Profit/Loss (P/L) is negative. Keep these simple risk management rules in mind while you trade.

As a trader you should establish a risk reward ratio for every trade that you place. In simple words, you should have an idea of how much you are willing to lose and how much you expect to gain in a trade. A general rule is that your risk/reward ratio should not be less than 1:2. Having a solid risk/reward ratio ensures that you don’t enter into a trade that is not worth the risk.

Use stop loss order to cap the maximum loss that you are willing to accept. Using stop loss helps you avoid the worst case scenario where you have many winning trades but a single loss large enough to wipe out all your profits in the account. Using trailing stops can be good idea.

There are two parts to placing the stop loss order. 1) Initially placing the stop loss at a reasonable level and 2) trailing the stop meaning moving it forward towards profitability as the trade progresses.

There are two recommended ways of placing the stop loss order. One involves placing the stop loss order 10 pips below the two days low of the currency pair. For example, if the EUR/USD recent low was 1.1300 and the previous day low was 1.1200, then place the stop loss at 1.1190, 10 pips below the two day low if you want to go long.

Another volatility based method is to use the Parabolic SAR indicator. It is found on most of the charting software provided freely by your broker. Parabolic SAR is a volatility based indicator. It displays a small dot at the point on the chart where you should place the stop loss.

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