How to Use Stop Loss in Forex Trading

Using stop loss is a key part of managing risks in forex trading. Before you make a trade, you should be very clear on how much risk you are willing to take. Say you find a swing trade setup with a high chance of success and a risk-to-reward ratio of 1:3.

How do you figure out what the Stop Loss is?

The amount you are willing to lose if the trade goes wrong is your risk. Let’s say you’re okay with losing $500 on that trade. On a standard account, $500 is equal to 50 pips. Your profit goal is the reward. For a risk-to-reward ratio of 1:3, it should be $1,500 or 150 pips.

Some traders might not be happy with a stop loss of 50 pips (SL). You know best how much risk you’re willing to take. For swing trading on higher time frame charts, like the daily chart, you will need an SL between 30 and 50 pips to give the trade a chance to work out. Too tight of a stop loss, like 20 pips, and it’s likely to be tripped by the noise soon. If your stop loss is too big, you could lose too much.

So, when you enter a trade, you should always think carefully about the SL. Where to put the first stop-loss order of 50 pips? If you use candlesticks, you can figure out where to put the SL by looking at the patterns on the candlesticks. In fact, a good trading system will tell you where to put the stop loss.

Now, if the trade goes well and starts moving in the direction you wanted, you can move the SL along with the daily movement of the trendline. A trailing stop is another way to trade when there is a trend. Replace the initial stop with a trailing stop once the trade starts to make money.

A trailing stop moves along with the price by the number of pips you choose. For example, if the price is going up, you might set a trailing stop of 20 pips. This stop loss will always be 20 pips behind what the price does. So, once you start making money, you can stay in the trade as long as the trend stays the same.

When the trend changes and the price moves back by 20 pips, this trailing stop will be triggered, and you will be out of the trade. No matter what, knowing how to use a stop loss is an important skill. With time and practice, you will be able to figure out where the stop loss should go.

“If you don't find a way to make money while you sleep, you will work until you die.”

- Warren Buffett


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