Forex trading: how to set stop loss order and when to exit drifting positions

Every trader enters a position with the expectation of a favorable financial gain. Of course your past trades have been successful but this trade is not occurring in a way that you want it to be. The trade simply stays flat. You might end up holding a position for long because you strongly belief that it will change on of a sudden. But this is not the case because the position still keeps drifting for almost two weeks and you are now wondering what action you should do.

How do you decide when to pull the plug?

Each time you enter a trade you should always make sure that you have another place such as Plan B, Plan C etc for any possible outcome that arises unexpectedly.

You should also be optimistic as well as pessimistic whenever you enter a trade so basically you should also look at the downside as well as the upside potential of the trade. Many traders make use of a low risk/reward ratio but this should not mean that you should exit a trade when you get a gain of $2. The ratio is often used as a way to decide whether to trade or not.

The reward to risk ratios vary to each and every setup you make and the setups include the head-and-shoulders pattern which looks at the target price and also to include the breakout from a pullback which looks at the swing movements at several points.

It's About Time

forex trading requires you to think very hard and make complex calculations of the upside potential. Of course this is always true, whenever you enter a trade position you simply tie up your capital that could have been used for other trade. You can not enter another trade whilst in another trade and this is the opportunity cost. When you have a drifting position there are several aspects you should keep in mind. These factors will determine the level of your risk in any trade position that you enter. The factors are as follows:

- Volatility of underlying security
- Size of position
- Time in market
- Pre-determined stop order

As a day trade you should try by all means to minimize the time you take to trade on a given position and try to avoid the day to day price gaps. Therefore you should not hold a position overnight because you will now be ignoring this concept. By increasing the time in a position you will also be increasing the probability of the trade blowing into bad news. A drifting position can really destroy your trade only if you hold on to a position for a long time.

To place yourself in a good state of mind you should be correct on the price movement of a particular trade in a given period of time. The longer you stay holding on a position is the higher the risk. Therefore you should note that a position that is held for a long time is very risky.

The time you take when holding a position in any trade you should consider on tightening your stop-loss so as to exit a trade at apparently the right time. This will certainly enable you to hang on to the opportunity and you will certainly minimize your risks.

Therefore you will certainly make a profit right soon after entering a trade and you should increase your protective stop so as to accommodate the trade whenever it makes a downtick. Here are some ides that will help you;

- Pretend it’s an expiring option
- If it doesn’t feel right, get out
- Adjust your stops to force a trade

Another good strategy to set stop orders is to use the closest support. To find the support, it is easiest to use an interactive chart and use the low value on the day with lowest price, not the closing price. Set the stop around 1% - 2% below the support. For example, if you set the stop $0.50 below the support, this must correspond to at least 1%. If not, then keep going. The idea here is that the stock will test support. This is a usual thing and healthy. Many times the currency will break support slightly, but come right back. You have to allow enough room for the currency to move past support before the stop.

Some traders do not set their stop loss orders when they open positions. There are many reasons that traders avoid using this order, the primary one is greed. If you initiate a trade and feel that the tide is turning against you, it is natural to try and stay in for a market reversal so that the position goes in your favor and you always expect that market will reverse, thus turning your loss into a profitable position in the forex market. However, sometimes this is not what really happens when the losing position becomes more painful. However, if you are using a stop loss order, you do have to face unlimited losses. A stop loss order can reduces your trading risk.

Other traders set up stop loss but when it is close to be hit they tend to move the order which will increase their potential risk or just cancel it. Without a stop loss, nothing stops your trade from going against you until you receive a margin call and all of your open positions will be forced to close automatically at huge losing positions.

As a good trader you should definitely exit a trade that is flat and you should never anticipate that particular trade to move overnight. You should bear in mind that this is very risky and to minimize your risks you should get into a trade that is moving significantly. As a trade you should have discipline and you should be able to watch each trade and also have patience by try to monitor and figure out which particular trade would be best for you to enter.