How to Place Stop Losses in Forex

1. How to Place Stop Losses in Forex It is important to know how to set the stop loss. A Stop Loss is determined as an order that you send to broker telling them to limit the losses on the particular open position or trade. As for the take profit, it is an order that you send to your broker instructing them to close the trade when the certain price reaches the specified price level in profit. The first thing the trader should consider is that the stop-loss must be placed at a logical level. It means a level that will both inform us when our trade signal is no longer valid and that makes sense in the surrounding market structure. There are numerous tips on how to exit a trade in the best way. The first one is to let the market kick your predefined stop-loss which you placed just as you entered the trade. Another method is that you can exit a trade manually because the price action has generated the signal against your position. Knowing how to calculate stop-loss in Forex is important, but we would like first to mention that can end up being emotion-based. For instance, you could end up manually closing the trade just because you think a market is going to hit your stop-loss. In this situation, you feel emotional, as the market is moving against to your position, despite no price action based reason to exit manually being present.

2. The purpose of stop-loss is to help a trader stay in a trade until the trade setup, and original near-term directional bias is no longer valid. The goal of a professional Forex trader placing the stop-loss is to set the stop at a level that both grants the trade room to move in the trader favour. Essentially, when you are identifying the best place to put your stop-loss, you should think about the logical level that the market would have to hit to prove your trade signal wrong. Hence, stop-loss traders want to give the market room to rest and also to keep the stop-loss close enough to be able to exit a trade as soon as possible if the market goes against them. This one of the fundamental rules of how to use stop-loss in Forex trading. A lot of traders cut themselves short by placing their stop-loss to close to their entry point, only because they want to trade a bigger position size. But here is the trap when you place your stop too close because you purpose to trade larger position size, you are actually invalidating your trading edge, as you need to put your stop-loss based on your trading signal and the current market conditions, not on money you suppose to make.