Forex Stop Loss Levels A Guide From Vantage Fx Uk

Stop losses are a crucial tool in Forex trading

. They can both lock in profits and limit a traders potential downside. This introductory guide from Vantage FX UK (http://www.vantagefx.co.uk/) takes a look at stop losses in more detail.

Stop Loss Levels in Forex Trading

Managing losses in Forex is every bit as important as identifying correct trading opportunities. Many traders do not have a stop loss strategy, and one possible reason for this is that trading without a stop loss will almost certainly increase your win to loss ratio. However, the short term pleasure derived from looking at your trading history and seeing eight or nine wins out of ten can be quite easily evaporated by the catastrophic loss from just one bad trade.

The idea that being beheaded by guillotine is better than having your head taken off by rusty saw may be true but the whole point of being in the Forex market is to at minimum survive and hopefully prosper. Small losses can be learned from and managed, but big losses can cause a complete confidence meltdown as well as a financial meltdown. Traders should understand that losses are one part of a trading cycle and no one should believe they can be avoided.

Formulating a Stop Loss Strategy

Creating or finding a stop loss strategy depends on any traders circumstances but the underlying question should always be How much am I prepared to lose on this one trade? or At what point has the trade not reacted in the way I anticipated?. The latter should be the most important and the trade size made to fit the cost.

To help create a strategy you should also consider risk reward ratios. There is little point in trading for 5pt profits if youre using 100pt stops. It is an FX certainty that you wont be in the markets too long.

Whatever type of trading strategy you use you should be clear in your mind at what point the trade has not reacted the way you anticipated. There is always a time when you can say to yourself that wasnt meant to happen. A good entry point should allow a tighter stop as you are closer to the point at which you can identify the trade is incorrect. This logic negates the idea you need to have a fixed number of points as a stop loss level. It is illogical to set a 50pt stop loss when you can see that your supporting level on a buy is at 65 points for example.

In Summary

With all this in mind you should now be seeing the relationship between entry and stop and that this is the basis of the creation of a stop loss strategy and the subsequent importance of entry points and loss management. So long as you stick to the checks;

Identify the point where you see that the trade is wrong.

Set yourself a realistic risk reward ratio.

Ensure your losses are affordable to you.

You can then protect your trading bank and avoid self inflicted, confidence sapping, poverty inducing misplaced belief that trading with no stops is any sort of strategy. The next discipline and one that few traders stick to is never move a stop. Like most teachings it is shouted from the roof tops but seldom adhered to. If its wrong, its wrong. Cut, move on and remember: the first cut is the cheapest.

To learn more about stop losses or any other Vantage FX UK trading tools, visit http://www.vantagefx.co.uk/

Trading derivatives and Forex carries a high level of risk to your capital and you should only trade with money you can afford to lose. Forex trading may not be suitable for all investors, so please ensure that you fully understand the risks involved and seek independent advice if necessary.

by: Vantage FX UK

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