Stop Loss Managing

The Foreign exchange market is considered to be a risky but at the same time profitable market segment. Dealing with currency always requires specific skills. These skills include in particular perfectly accurate setting of stop loss orders. This ability will help avoid undesirable losses and optimize the Forex trading strategy. Accurate stop loss setting is a real art helping, on the one hand, eliminate risk of losing big money and, on the other hand, it helps avoid unexpected snapping into action (due to market volatility, not to trade direction change).

Many traders estimate the level of stop loss order considering the sum of maximum losses that can be afforded for a single transaction. For instance, if a trader has a deposit of $100,000 (with leverage 1:50) than he opens a long position in USD/JPY currency pair at 120.00 for the amount of $1,000,000 with 5% maximum value of loss, i.e. $5,000. In this case such a value is 60 pips (the price for a pip is 1,000,000/120.00 = $83,33). It means that stop loss order for sale should be set at 119.40.

Some specialists advise to set these orders directly beyond strong resistance and support levels. The reasonableness of this method is based on the suggestion that market volatility never breaks out strong support and resistance levels, otherwise this signal is treated as a reversal one meaning that the positions opened in opposite direction must be closed immediately. However, after long practice of different ways of setting stop loss orders many traders come to a conclusion that there is no clear working decision, though first it seems to be simple.

It usually depends on Forex market volatility. If A event occurs with probability of 0.8, the probability of A event not happening (?`) is 0.2 (when ?+?`=1). If we speak about two independent events A and B, the probability of at least one of them taking place equals ???+???`+?`??=1-0.2?0.2=0.96. But when we are speaking about three independent events, the probability of at least one of them taking place is 1-0.2?0.2?0.2=0.992. Hence, to achieve good results in Forex a trader needs to open positions in three different pairs. In this case at least one of these opened positions appears to be profitable, while the two others (in case of undesirable development of events) need to be concluded getting only marginal profit or even closed with small losses.

Order Correlation with Forex Strategy

When oscillators deliver first reversal signs traders are advised to close half of a profitable position and to move stop loss close to the level of closure. If price actions continue to move in the same direction with oscillators showing reversal/rebound signs, traders should move the stop loss all the time following the price action. In case of rebound with oscillators showing trend resume it is the right moment to open position again, doubling the earlier opened position in trend. Stop loss order is advised to be set close to the level of maximum rebound (usually at 0.618 level from previous movement).

Some traders recommend to take decision of setting stop loss in accordance with statistical market features such as medium deviation and to place stop loss at the distance from a sigma to several sigmas depending on chosen trading strategy. Others propose very original ways and methods. But however, efficiency of setting stop loss orders is one of the key skills required from a Forex trader to obtain good results in currency trading.

Regards, Dennis Vydrin