Forex Blog: Currency Trading

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Using a stop-loss in forex trading is a money management tool. One of the questions I get most often from members and query makers is where do you set your stop loss?

There’s a plethora of myths, systems, strategies, must-dos, never-do’s etc all over the internet regarding how to manage your money as a forex trader and how to effectively utilise the stop-loss to minimise risk and loss.

There is the schools of “2:1″ whereby you are ridiculous if you do not aim for a profit of at least double your stop loss. Such a system is encouraged by some mentors online.

I actually will recommend a very good introductory ebook right here. “Bird Watching In Lion Country-tec. The link to order it is http://www.fasttrackforex.com/recommends/bwilc

If you haven’t yet bought this book, then please do so now, it will serve you no end.

Now, I do not subscribe to everything the man says. In fact I strongly disagree with some elements of his strategy.

What I do like about the above ebook though is that he leaves it up to you to take responsibility for your life, yourself, your trading and your strategy. I admire this ebook in that way.

Going back to the stop-loss in forex.

What is my own personal money management strategy for trading using a stop-loss?

I am very cautious about how I use my stop-loss (ie I keep them tight and enter trades only when I’m super-confident). Here is why…

If you go short in cable at 1.9890 with a target of 1.9867 for example. And the trade goes against you. Lets say you have a stop at 10 pips (because you’ve entered a high probability trade based on some of the information at this blog, http://www.sambeatson.com for example. If the trade goes against you and you get stopped out then you lose 10 pips.

If the trade goes against you 30 pips and you have a stop loss of 30 pips then you lose 30 pips. Now the obvious question here is would you rather lose 10 pips or would you rather lose 30 pips. Well, obviously 10 only right, if at all?

What if though the trade goes 27pips negative then turns positive? Well, your stop loss is too far away to get stopped out and you might end up making your 10 pips.

However, if you got stopped out at 10 pips, you can re-enter the trade at where the trade went 20 pips against you if you see another opportunity and you will make 30 pips back giving you a net profit of 20 pips instead of your initial 10.

My message on stop-losses in this post (I will post another on how exactly I set my stop-losses later in this blog) is to be cautious and set your stop at a point where if the price goes past that point, you’re trading idea was basically wrong. This may be a few pips above the high/low of the previous candle. It may be near to a fibonacci retracement line, it may be above/below a support or resistance line or pivot line.

My stops are therefore calculated independent of any target I might have in mind. I do not follow a set rule as such. Let’s just say my stops are normally around 10 pips or less and I’m very happy with how I trade.

I think the crux is knowing when to place a trade. If you know when to place a trade and do it properly, with discipline and planning as well as unconscious competence (more on that in the personal development category I will open at this blog)…then the likelihood starts to lay that you are not going to need to use your stop-loss.

Because I use stop-losses as a strategic money management tool and I combine them with my own developed systematic way of trading forex using different methods under varying market conditions, I find that I don’t get stopped out because its there as a safety measure. When I do get stopped out, I’m normally relieved and happy because I’ve saved myself from ruining my capital and account by utilising a powerful money management cap. I made a decision and stuck by it and can still be proud of myself. The next opportunity is ALWAYS just around the corner.

That is why this market is so exciting. A truly great trader, private investor fund manager and mentor said to me once,

“there are so many losers in this market because there are so many forex traders trying to become successful forex traders. Instead of focusing on becoming a successful forex trader, put all your energy in to becoming a successful opportunist. That is how the market makers think and that is how you’re going think.”

Think about that and assimilate it in to your consciousness. Then go and look for opportunities to make money in the market. Be ruthless in your profit taking. Small profits add up and then you’ll start finding the big profit moves.

Once of the richest men in England, a member of the royalty and also a highly successful investor and realtor once said,

“look after the pennies and the pounds will look after themselves”

That’s all for now,

Sam

PS. Please DIGG THIS post and blog by clicking on the link below…