Techniques for Setting Stop Loss Orders

Leverage is a trading tool that all forex traders use when they trade in order to increase the amount of their profit. However, it is also very risky because it also intensifies the chances that your trading account will be wiped out if a trade goes against you. It is very tempting to use high amounts of leverage, both because it can greatly magnify profits but also because it is so readily available. In fact, your broker may even offer you leverage of as much as 100:1, which means, for example, that if you have just $500 in your trading account, you can trade as much as $50,000.

Hence, in order to reduce your risk of losing too much, you have to learn to set the appropriate stop-loss orders. Here are some of the approaches you can take in setting stops:

1.    Static stops. In this method, you set your stop loss a certain number of pips from your entry price. For example, if you are trading the USD/JPY currency pair and you enter at 1:9800, you may opt to fix your stop loss order at 20 pips. This method is ideal for traders who are risk-averse and willing to limit their potential profit in exchange for also reducing their potential losses, as well as new traders who are still learning the ropes.

2.    Static stops based on market indicators. With this method, the trader considers what the market conditions are before setting their stop loss orders, by monitoring indicators such as price swings or average true range. This method is ideal for traders who have more experience in the markets and can more accurately analyze the risk of a trade.

3.    Trailing stops. In contrast to the first two methods, these stop loss orders can be moved based on the way the trade is going. The trader adjusts the stop and limit orders based on the way his trades are going. For example, if the trade is going his way and he wants to increase his profits, he can remove or increase the limit order. On the other hand, if he wants to protect himself, he can increase the stop order to a level close to the entry price. There are a number of ways you can create trailing stops, such as dynamic stops in which you move the stop every time the trade moves a pip in the trader’s favor; fixed stops in which the stop adjusts in increments every time the trade moves in their favor; manual stops in which the trader monitors the trade and manually moves the stop based on how the trade is going. These methods are recommended for traders with a high level of experience in the markets since they can be tricky.