How To Avoid Premature Stop-Loss Triggers

How To Avoid Premature Stop-Loss Triggers

Placing stop loss orders can save a FOREX trader from sustaining heavy losses. While more advanced and experienced traders know what type of parameters to include in their stop-loss orders, it is more challenging for the beginner trader to determine these parameters. The beginner trader wants to save themselves from losing money but at the same time does not want to trigger a whole series of unnecessary sales that cost a lot of money in commissions either.

In particular, such unnecessary sales might cost the beginner more money because the market is actually showing signs of a quick rebound. They need to have reasonable protecting for their investment to mitigate all angles of risk. So what is a beginner trader to do? Glad you asked. The tips in this article are meant to demonstrate how to evaluate what stop loss orders to use.

The first order of the day is called the percentage stop. Traders use a percentage basis to determine the parameters of their stop loss orders. This is a particularly useful method that is popular among new traders because it is the simplest. Stop loss is simply determined based on the maximum risk a trader is willing to take based on their whole account size.

Let’s take the 2 percent rule of thumb into account on a $20,000 account. That means that for a mini-lot of Euro-U.S. Dollar currency pair, a $400 loss kicks off automatic selling to prevent further losses. Just look at the 2% rule, and use it. As you become moderately practiced, you will learn what currency pairs have what particular attributes for losses and gains.

The next method is useful in evaluating the greatest fear of an investor — making a pre-mature market exit. The next method is called the Bollinger Band stop. The strategy takes into account the volatility of an asset. Volatility reflects a likely price movement over a time period. Keeping a stop loss order in line with the volatility prevents premature and expensive exits from the market. The Bollinger Band indicator is a visual measure. The stop loss order is placed as a short position above or a long position below the Bollinger Band.

The Trend Line Stop is the next method used to put in place useful stop-loss orders. It involves identifying support and resistance for a security’s pricing. If a long position is based on a tested trading system, the stop loss order is placed beneath a major support.How To Avoid Premature Stop-Loss Triggers

Along the same lines, for a short position, the stop loss order is placed just above the major resistance. What happens in response, is that if the price close is above resistance or below the support then the forecast is no longer valid. Always ensure a little protection exists between the stop-loss and the support-resistance levels.

The next method for determining of stop loss order that prevents premature exit from the market is called the Moving Average Method. The chart might use a 50 or 100-period chart. The stop loss order is placed above the moving average for the short position or below for a long position. Take care not to put the stop loss very far from the moving average so that only when a real trend reversal occurs does a trade get executed automatically.

It is a popular method to follow but has its own cons to it. The stop-loss range can be too big if the time period for the MA is too long, or the opposite if the MA is based upon too short of a time period.

The Average True Range method is another volatility based stop loss order strategy that many professionals use. The value of the Average True Range includes the volatility or average price movement over a time period. If the Average True Range or ATR that is 100 on the daily chart for a standard ATR of 14, it means a currency moved 100 pips per day on average for the past 14 days. Stop loss order is determined from a percentage ATR for a time period. Say, for instance, that a trader only uses an ATR that is based on 100 pips or more. This means the stop loss order is triggered if volatility increases above the normal range, which prevents a premature trigger.

The Fibonacci stop is another concept that is popular for traders looking to place stop loss orders. The Fibonacci levels, or Fibo, are the top of the mind for traders right now. The 61.8% Fibo number is a widely acknowledged retracement level. It helps a trader to determine whether their holding is bullish or bearish. Stop-loss orders are placed above the 61.8% level for a short position. For a long position, it is placed a few notches below 61.8%.

This helps avoid a premature exit from a trade. It means when a firm reversal is reached the stop loss order is put into effect.

The next stop loss order parameter uses recent highs and lows to make a stop loss order decision. Take an intraday chart, for example. For the stop-loss order, check out the intraday high to determine where to set the short play, which goes above the intraday high. The lowest price for the day determines where the long play gets placed. It is below the low for the day. This eliminates the possibility of ending up with a premature exit from a trade and saves traders from paying out excessive commissions while losing money. This is a trading tactic for scalping. Though, most people are best off if they avoid scalping. Though it is important to be introduced to all different trading methods.

Standard deviation stop-loss orders are based upon volatility calculations. A standard deviation reflects the likely price ranges for a given time period. Place stop-loss orders at a standard deviation to prevent unnecessary or random triggers. The drawback is if an abnormal distribution is in effect, which is rare in Forex.

There you have the long and the short of how to set stop-loss triggers. Use one method at a time until you have a comfort level with them. This will help prevent excessive losses.

One Response to How To Avoid Premature Stop-Loss Triggers

  1. Brent Bodin says:

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