Forex Stop Loss is more significant than Forex take-profit because it can prevent Forex Margin call. Let’s learn about Stop Loss strategy.
Stop-Loss Strategy: The 50% Stop-Loss
The benefit of this strategy is that it cuts the risk in half. For example, if you risk $200 on a trade, as the market goes toward your favor, you can move to 50% and cut the risk to $100. Also, this strategy utilizes a price action level. There is a lesser probability for the market to reach your stop-loss
For example, let’s say you enter a bullish pin bar. If the market finishes a little bit higher than your entry, you can utilize the previous day’s low as a place to hide the stop-loss. Rather than moving or closing the stop-loss, you can limit the risk up to 50%. Having previous day’s low as price action level, allows your freedom from worrying about how to set the stop-loss depending on arbitrary level
If you use market’s highs and lows for your stop-loss, there is more room for the market to move therefore, the market will become active. However, the downside of this strategy is that it still leaves 50% position at risk. Even though it lowers the risk, It does not guarantee from premature stop out.
”Set And Forget” Or ‘Hands Off’ Stop-Loss Strategy
For this strategy, you put your stop-loss and let your hands off from the market. By doing so, you lessen the chance of premature stop-out, which happens when you try secure the stop loss. Also, this strategy separates unwanted emotion from the trade, because you only need one-time action.
The strategy is quite hard to follow through, especially when there is a profitable trading opportunity you want to move the stop-loss. Also, this strategy allows maximum risk from beginning to end. Since there is no chance to protect the capital, it’s not the best strategy, but it still is useful as basic for multiple account trading.
Top-Loss Strategy: Inside Bar And Pin Bar
In pin bar set up, there is a recommended stop-loss placement. Whether it is a bearish or a bullish, put the stop-loss behind the tail of the pin bar. When the price reach that level, the pin bar will come out to be invalid. With this setting, it’s not a bad thing anymore, even if the price reaches the stop-loss. It only means that the market is letting you know that your pin bar setup was not valid.
This strategy has two options on putting the stop-loss. Behind the inside bar’s high or low, and behind the mother bar’s high or low.
The most common placement for inside bar is behind the mother bar high or low. Like the 50% stop-loss strategy, if the price reaches the stop-loss, it means the inside bar setup was invalid. With this strategy, there is more butter to stay in the trade after the entry until it reaches the stop-loss. When the currency pair market is choppier, this is very useful.
When you put stop-loss behind the inside bar’s high or low, there is better risk-reward ratio. But at the same time, it opens chances for early stop out long before you can see the market’s movement towards your expectation. Higher risk and higher return. That rule never fails here again.
Finding the appropriate stop-loss placement carries many variables, there is risk tolerance, risk-reward ratio, and currency pair type to consider and it all changes depending on what your trading strategy is. However, if you know the importance of stop-loss initially, you can study and evaluate the results to get you where you wanted.