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Reducing Trading Risk with Stop Losses

Stop losses are among the most reliable tools when you want to reduce losses in forex trade. There are many ways you can apply a stop loss in your trade. You can either use protective stops or you can use the market as a means of determining your stops. Whichever strategy you choose, you can be sure of better asset management when you are using a stop loss. In order to use a stop loss effectively though, you must understand how it works, and the different concepts associated with it

Stop Loss Order

The basis of the stop loss strategy is the stop loss order. This terminology basically refers to the pending orders that are identified and forwarded to a forex broker to inform them on when to exit the market. An exit is made when the prescribed conditions are met. For the order to work, you must have calculated it with a certain set of data. You must also have used one of the main stop loss approaches used in the market. These approaches include:

  • Breakeven stop loss
  • 50% stop loss
  • The pin bar stop loss

These approaches, among others, determine the level of risk a trader is willing to take.

Which approach should you use?

The kind of stop-loss strategy you choose to use should be informed by your level of experience. Most beginners in the market should take approaches that do not risk too much money. This is why an approach like the Breakeven strategy should be at the core of beginners trading strategy. This approach allows traders to risk little money since the stop loss is placed near the market entry position. Experienced traders, on the other hand, can use strategies like the Pin bar strategy. This kind of strategy relies on price action. Since experienced traders are more versed with price movements, they can apply stop losses at positions where they are likely to gain profits.

How do you place the stop loss?

In order to correctly place a stop loss, you should inform yourself on the various aspects of the market. You should, for instance, learn to identify the signals that indicate whether the market is bullish or bearish. You can then, move on to determine your bid and ask price afterward. The bid price is the price level in which you are comfortable to make a sale while the ask price is the price level which you are comfortable to buy. Much of the information you need on trading is available online for free. Going to a few forex seminars can also be very beneficial.

What else should you know?

Finally, you should understand that strategies like the stop loss operate under the prevailing doctrines of the forex market. This means that while the strategy is great for improving your chances of success, it does not completely remove the risks that exist in the market. The market operates under so many influences and the only thing that can help you make better strategies is getting the necessary experience. When you combine experience and a stop loss strategy, you can definitely expect better returns from the trade.