by Ahmad Hassam
Prices in the forex market are always jumping up and down and knowing exactly when to place a stop loss can help you from losing profits. It’s only natural that the forex market is volatile most of the time. In the short term, you will only find noise in the intraday forex market. This makes it difficult for new day traders to know exactly where to put a stop loss. Most of the time, prices in the forex market jumps 10-20 pips for no apparent reason, so understanding these jumps will help you determine when placing a stop loss is beneficial.
Most new forex traders get frustrated to find their stop loss being constantly tripped due to noise even when the market is going in the anticipated direction. A typical setting for new day traders is the static 10-20 pip stop loss. This is an arbitrary choice many traders make, however.
What they should consider instead is a trailing stop. Still, understanding trends is the key to success in the forex market. If you place the trailing stop loss too close, you will find your stop hitting too early. And if you place it too far, you will have to forgo potential profits if the price retraces later.
A better solution is to place your stop loss on dynamic levels. Most of the professional traders do use stop loss, but mostly place it on their computers making them invisible to their brokers. Nobody will ever tell you that your broker may be stop hunting against you. When a broker finds many stop loss orders at a particular rate on his price feed, he will try to trip these stops using a momentary blip in the feed, explaining that the momentary spike happened due to a sudden large transaction in the market.
However, many professional forex traders only use a stop loss in their head. They continuously keep on updating it until they get the desired outcome. But you will need a lot of experience trading on the forex market to do this. For beginners, Moving Averages, Bollinger Bands, SARs, etc can be easily used as dynamic stop losses. It is a good way to manage your risk while letting the currency market do what it wants.
The more experienced a trader you become, the more you are going to realize that placing a fixed stop loss actually hurts you psychologically and profit-wise than it will help you.
Another thing to remember is that you should not try to trade before or after a major economic news release. You should not try to place stop loss close to or at round numbers. And you should also not try to trade in times of thin liquidity in the currency markets.
Stop hunting is something that you should know to improve your quality of life. Many forex brokers prey on new traders and keep on tripping their stop losses terming it market noise. You can discover the best forex signal service by doing research online before attempting to get your feet wet. Once you are familiar with how the game is played, you will better understand how to lock in profits with a stop loss.
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