“What is stop loss forex trading strategy?” No wonder, this is the question you want to be answered now, isn’t it? Well, in the ever fluctuating market of forex, it is important to learn both – how to earn maximum profit and how to manage risk and losses. While in most of the places, you would find traders elaborating you the profitable features, but truth is, there are high chances of losing your investment.
Stop loss is the answer for risk management. Now, the point is, one has to set stop loss orders strategically for meeting risk prevention goals.
“Idea is to maximize profit while minimizing risks.”
Let’s begin with types of stop loss forex trading strategies:
There are mainly 3 important types of stop loss strategies used in the market.
- Volatility Stop
- Time stop
- Confluence stop
1. Volatility stop
This technique of stop loss in forex trading is mostly used by professional and experienced traders. Volatility stop is the approach that can adapt to the changing trends of the market conditions. In cases when this volatility rises higher, investors choose to use larger stop loss orders widening their targets. Again as it comes down, a stop loss that is more conservative or close to their entry is used.
ATR or Average True Range is the volatility indicator that helps you to set your stop loss order. Identify current value of ATR and multiply that by your chosen factor.
2. Time stop
The time stop approach is when, as based on time, a trader exits his trade. Here in this technique, he exits after a certain amount of time rather than price. However, it is you who has to define the allowed time before you exit.
Often when nothing happens even after entering a trade, it is better to exit that trade and wait for trade signal coming next. With this time stop approach, you would exit a trade with sideways movement and long inactivity phases.
3. Confluence stop
This is the most common approaches of stop loss in forex trading. In this technique, traders make use of previous lows and highs, resistance and support levels, trendlines, moving averages, channels. In case you see your price is taking out stops just by some points, either more confluence levels can be added or with a little more padding, you can keep it outside that danger zone.
Maximals: calculating stop loss in forex trading
Maximals is another technique that would give you a precise formula for calculating the probability of that price which during a set time is moving to a distance from open. For a given market volatility, you can get a comprehensive distribution of the price moves. Good part is, this approach works both with implied or future and historical or past volatility.
Stop loss forex trade when followed in a right strategy can help you save your account from running into huge losses. A beginner must understand that this largest global financial industry is quite unpredictable with sudden happenings. So, just be careful and move ahead. You are sure to come out winning. Good Luck!