How to lower your losing risk on forex trading

As a forex trader you are facing such difficulties as on which market to trade, which day is best for your trade and when do you enter and exit a trade? forex trading may seem very simple but you should know that it is complex and requires a lot of practice and discipline. In this article we will look at how you are able to make volatility and stop placements so as to obtain a huge profit gain from your investment. 

 Therefore we will look at how best you are able to adjust your stops so as to reflect a positive volatility. 

 You should be able to risk a fixed percentage on any given position and volatility would be your secondary at which the stops will be placed. As a professional trader you should be able to risk at ¼ - 3/8 of a position in forex or alternatively you can risk at ½ - 1 of the total value on position. 

 Both of these are known as tight stops and they will certainly move gradually or they should move immediately in their favor. If this is not true then they are not correct and hence you will be able to exit trade immediately without having incurred a huge loss. This approach will definitely work well for you because it is one of the proven approaches that have been found to be solid. 

 Basically when you are trading you should make sure that you have two stops: an account stop and a position stop. Generally a position stop is the maximum currency price that you are able to set for your trade movement which you will buy or sell or covers your short. As stated above you should make use of a 5% stop at most cases. You should only allow a new buy to fall not more than 5% below your cost. If it falls beyond that point then definitely you should sell it. Generally you can make use of a wider stop such as a 10% stop so as to increase the room if necessary. 

 At some instances, once you have made a stop decision then it is best to stick to it so as to work effectively. For example, if you are to make a 5% stop and the price falls beyond that point and then try to make excuses and increasing your stop percentage. You should never wait for the market to prove you wrong. Once you have made your stop percentage do not allow any revision what so ever to take place due to the fact that the stop percentage is the maximum allowable loss that your are prepared to incur or you can afford to lose. 

 So how are you going to place stop loss orders. There are many different ways, but here are some observations as they relate to long term trend following. 

 1. Support and resistance - Yes, good old fashioned support and resistance is a good way to place a stop. If for example you are trading a breakout and you think it’s valid the stop is behind the breakout point. 

 2. Never move a stop to soon - Many traders trail stops to lock in profits and this is a critical error even experienced traders do. 

 This in most cases simply sees them stopped out by volatility and reactions to the major trend. They then end up with marginal profit and miss the big trend. 

 If you are long term trend following and have confidence keep the stop back and take dips in open equity, this is the only way to hang onto to the really big trends so get used to the feeling, its not nice and you need lots of discipline. Keep your eye on the big picture and it will be worth it in terms of profit. 

 3. Don’t use indicators for stops - While you can use momentum and other indicators to enter trades and determine price strength and value areas never use them for stop placement. We love the stochastic but as price indicator but would always use chart support and resistance first. 

 Bollinger bands are really for defining volatility and value areas it should not be used for stop placement on there own. Keep in mind Bollinger bands used in isolation would re set stops everyday and could create a huge loss. And our own view is support and resistance is the simplest and easiest way to place stops. 

 Another alternative to this approach is that the stop placement should be adjusted relative to current volatility. A protective stop would be the one at the 5% range and this will be a huge difference compared to the one that would have been placed at the 1% range. This approach will certainly make your level of risk to be reduced than compared to the first approach because it give more breathing room but you should also be careful due to the fact that it can also give you bigger loses. 

 All approaches are good and they will only depend according to the way you trade giving yourself a risk tolerance. You will certainly incur health loses from time to time and this will significantly boost your income. If you really want to reduce you level of risk then the first approach will be great for you. In order to make your position size and position stops ahead you should try to anticipate the price at which you will get in. If you assume a 3% beyond your pivot and this will be conservative on your part especially if you are a vigilant trader. Getting as much closer to the pivot will certainly reduce your level of risk and you will also be able to trade on several markets in a day at a short period of time. 

 This is alternatively a personal choice that you may have to make. The great part is that it does matter which approach you take the important factor is the use of the stops.