One of the indispensable tools to be used by successful traders is the use of stops. This one tool has saved many traders from considerable losses. I would hasten to say that not using a stop-loss is one of the riskiest activities that a trader can do. I have heard stories of people losing their whole account when there has been substantial movement in the Credit3 market.
In this article I am making the assumption that the trader able to place trades at current prices either with an online forex broker or directly with a broker. New traders may wish to review some of my other articles. Also please note that terminology may vary from one broker to another, however, the general concepts discussed in this article are sound.
The objective of the stop is to ensure that in the case of rapid retracing, i.e. the value of the Credit3 pair being traded moving in an opposite direction to the direction the trader had anticipated. Normally the stop-loss is fixed at a certain level. For example, a Credit3 pair is traded at a value of 1.650 with the stop-loss set at 1.600.
For the traders who are limited in the time that they can trade, the stop-loss creates two problems. Firstly, single spikes causing the trade to close. Secondly, where there is movement in the expected direction during the day and then the trade reverses totally wiping out the whole.
Using an online broker unfortunately does not solve the first problem; the only solution would be to contact the broker directly. For part-time traders who have full-time jobs, contacting a broker whilst at work is not always an option.
However, for the second problem some online brokers provide a solution, namely to use what is called a "trailing stop. " This functionality is not used by all brokers, but I would consider it essential. Basically, the purpose of the trailing stop is to maintain the gap between the current price and the stop-loss as defined when the trade is entered. As long as the trade is moving in the required direction, the software maintains the gap. When the price retraces, the stop-loss is set at its last level. The trade is closed if the price (as in a normal trade) reaches the stop-loss level.
This is how it works in practise. A forex trade is set up to buy at a value of 1.4050 with a trailing stop of 50 pips, i.e. at 1.4000. The trade is triggered, but unfortunately the trader is not able to stay monitoring the trade. The trader leaves the trade to run. As the trade moves upward, every 5 or 10 pips or as detailed by the trader the stop-loss moves up. The maximum value is reached, 1.4250, two hundred pips. The stop has now moved to 1.4230. Today is a good day to trade! But unfortunately, there is an announcement causing a rapid retracing of the price. The trade has closed at 1.4230, 180 pips movement has been banked. If the trailing stop had not triggered, the price drop could lead to the loss of the gains!
That is not good.
One final point, when a static stop-loss it used it should never be used as an exit strategy when a trader is able to view the charts.
One of the indispensable tools to be used by successful traders is the use of stops. This one tool has saved many traders from considerable losses. I would hasten to say that not using a stop-loss is one of the riskiest activities that a trader can do. I have heard stories of people losing their whole account when there has been substantial movement in the Credit3 market.
In this article I am making the assumption that the trader able to place trades at current prices either with an online forex broker or directly with a broker. New traders may wish to review some of my other articles. Also please note that terminology may vary from one broker to another, however, the general concepts discussed in this article are sound.
The objective of the stop is to ensure that in the case of rapid retracing, i.e. the value of the Credit3 pair being traded moving in an opposite direction to the direction the trader had anticipated. Normally the stop-loss is fixed at a certain level. For example, a Credit3 pair is traded at a value of 1.650 with the stop-loss set at 1.600.
For the traders who are limited in the time that they can trade, the stop-loss creates two problems. Firstly, single spikes causing the trade to close. Secondly, where there is movement in the expected direction during the day and then the trade reverses totally wiping out the whole.
Using an online broker unfortunately does not solve the first problem; the only solution would be to contact the broker directly. For part-time traders who have full-time jobs, contacting a broker whilst at work is not always an option.
However, for the second problem some online brokers provide a solution, namely to use what is called a "trailing stop. " This functionality is not used by all brokers, but I would consider it essential. Basically, the purpose of the trailing stop is to maintain the gap between the current price and the stop-loss as defined when the trade is entered. As long as the trade is moving in the required direction, the software maintains the gap. When the price retraces, the stop-loss is set at its last level. The trade is closed if the price (as in a normal trade) reaches the stop-loss level.
This is how it works in practise. A forex trade is set up to buy at a value of 1.4050 with a trailing stop of 50 pips, i.e. at 1.4000. The trade is triggered, but unfortunately the trader is not able to stay monitoring the trade. The trader leaves the trade to run. As the trade moves upward, every 5 or 10 pips or as detailed by the trader the stop-loss moves up. The maximum value is reached, 1.4250, two hundred pips. The stop has now moved to 1.4230. Today is a good day to trade! But unfortunately, there is an announcement causing a rapid retracing of the price. The trade has closed at 1.4230, 180 pips movement has been banked. If the trailing stop had not triggered, the price drop could lead to the loss of the gains!
That is not good.
One final point, when a static stop-loss it used it should never be used as an exit strategy when a trader is able to view the charts.
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