It is important that you know about placing appropriate stops when FX trading on the foreign exchange market. This placing of stops can be highly advantageous in those situations when trades can turn against you. If you do not use stops as a risk management technique you could lose a lot of money quickly.
What are stops in FX trading?
Stops are the points set by you at which you allow your trades to close automatically. These can be both stop loss or stop profit points. When you make use of a stop-loss, you are limiting the amount of loss you are willing to carry. When you make use of a stop-profit, you are limiting the amount of profit you take. You should use suitable analysis methods to determine both these points. This will ensure that you are setting the stop points at a realistic level and at the most appropriate time.
What are trailing stops?
Trailing stops have gained popularity in recent years. It allows you to set the stop-loss limit, but keep your profits that have already accumulated. When you set hard limits and the trade swings prior to you taking your profits, it is possible for you to lose your profit and eventually show a loss. With a trailing stop this will not happen as the stop moves along with your profit margin.
You can set trailing stops to a specific number of pips. For example, if you place a position at $2 and you set a trailing stop for 20 pips, that stop will be activated at $1.9980. If the price of your position moves upward to $2.0020, the trailing stop will be activated at $2. This indicates that as your profit increases, the trailing stop moves up accordingly. An example is if your position moves downward from $2.10, the stop will be activated at $2.0980. This will give you a profit of 980 pips.
What are hard stops?
These are points that you would not feel comfortable passing. The point can be set based on resistance and support levels or you can calculate it to a particular number of pips. When you used levels to determine the points, your technical analysis will be able to determine the correct prices to set it at. When you use the points to set at a specific number of pips, you simply determine the amount of pips you are willing to lose. For example, you can set it at a level where the price moves down 10 or 20 pips.
Hard stops are useful to avoid emotional FX trading. Once these stop points are reached, your position will be closed and you will not be able to consider the move at all. You may at times find these hard stops extremely restricting and it is during these times that you can make use of trailing stops.
To trade effectively, you must have a clear idea of how to use the different types of stops. Ensure that you know exactly how to set this on the trading platform you use. The easier the methods to set these stops, the less risky your trades become.