Types of Forex Stop Losses

Brief Introduction of Different Ways of Setting Stops

 

Different Types of Forex Stop Losses! Foreign exchange trading, or Forex trading (sometimes simply called FX trading) is to the uninitiated a complex and difficult beast. But while it is a nuanced process, it is not prohibitively difficult. It is possible to gain an understanding of Forex that will aid you in your trading and increase your earnings over time.

One of the trickiest but most important elements of Forex trading is the stop loss. Stop losses, as the name implies, stops or cancels a trade once a certain amount of loss has been reached. This prevents losses from becoming too overwhelming.

There are a couple of Stop losses strategies, and there are various ways to execute them. This article covers the different basic types of stop losses, each of which is a business strategy for reducing loss and maximizing gain.

Types of Forex Stop Losses

Stop and Reverse

Stop and reverse stop loss orders involve more nuance than most other types. These orders involve setting a limit to your losses that will stop the trade once the market moves too far in one direction, while simultaneously making another trade in the opposite direction with another stop. These are powerful tools, but they are not for the uninitiated.

Types of Forex Stop Losses

Trailing Stops

Executing a trailing stop is a great way to be sure that you hold onto whatever profit you do make. This is a strategy that sets a stop in one direction that moves with the market, trailing it, as you make a profit. As your profit increases, the stop moves and the line at which your trade will stop changes, making sure your profits are not erased completely. This is a solid, safe way to execute a stop.

 

Percentage Stop

A percentage stop is the most basic kind of stop order. With a percentage stop, the trader risks a predetermined percentage of their trade, setting the stop so that the trade is cancelled once that percentage has been lost. The tricky thing about these stops is that sometimes natural market fluctuations stop the trader out of a good trade if their percentages are too small.

 

Volatility Stop

Volatility stops cancel a trade once the market begins to fluctuate at some predetermined level of volatility. This stops do a great job of protecting against quick, unexpected losses, but it is important to not choke out your trade by setting this sort of stop to small — some volatility, particularly in certain markets, is perfectly natural.

 

Chart Stop

Chart stops are rather intuitive. Markets all include support and resistance to your trades, and those things often and in general follow patterns. Those patterns can be measured and represented by charts. So why not use those charts to determine your stops? Rather than setting a number (volatility or percentage, for instance) that will potentially choke out your trade prematurely, you can use a chart stop, which will use the support and resistance of a chart of a given market to decide when and where to stop your trade. You decide how much resistance you’re willing to accept and you allow the chart to determine how much loss that means you are risking. It is a great way to be sure to follow the trends of a particular market and not get stopped out of a good thing.

 

Time Stop

Time stops are simple, mechanically. They open and close a trade during a particular time or times. This can mean that a trade is run for a set time and then cancelled, or it can mean that it only runs during certain times. The important thing with time stops is to do your research. You need to know the times during which some market will, for you, perform the best. These are the times you want to make sure you are trading when you execute this sort of stop.

 

Conclusion

Types of Forex Stop Losses

Stop orders are not always easy, and it isn’t always obvious which kind to use. What is clear is that they are in general a good idea in the Forex market, but you won’t always know immediately what kind you should use or how to set the parameters of the one that you choose. If you set your parameters too restrictively, then you will be stopped right out of the profit you are trying to make. This is especially true with simple stops such as percentage stops.

At the same time, you want to protect yourself. This does not happen by being restrictive with your stops, but by doing good research and knowing the specific market you are in. Work with your analytic tools, speak to your broker, and make the best, most informed decisions you can make.