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FOREX TRADING 2020: Top 4 STOP LOSS Techniques

forex trading stop loss techniques

Since the subject of stop loss techniques is extensive, involving many other topics, I will discuss only the initial stop loss techniques that are necessary to control your losses.

Let us now go through the 4 best stop-loss techniques applicable to many different trading systems.

1. Stop Loss Based On Volatility (Volatility Stop)

Imagine a market where the candles have a width of 120 pips. It makes sense to put a stop loss at 5 pips away from your point of entry, right? Unless your strategy is not a form of super-extreme scalping, the answer is 'no'.
If you go in a certain direction, you have to ask yourself; if you're giving the market time to develop in your favor, without which, insignificant fluctuations close down your position prematurely.
On the other hand, one stop too distant, will lead to losses that you can hardly recover.
Looking at the average volatility, you can understand, therefore, why it makes sense to place the stop loss based on the breadth of recent market movements.
Thanks to the ATR (Average True Range) indicator, you can easily obtain the volatility of the last N bars. The value obtained will be the basis for choosing your stop.

2. Stop Loss Based On Support And Resistance

Another powerful way to set the initial stop loss is based on what is the reality of the graph.
Markets will offer a wealth of information:
- Are the prices clearly moving in one direction?
- Are the prices are moving wildly within a certain range?

3. Stop Loss Based On Indicators

Some traders, lovers of technical analysis, tend to base every aspect of their trading on the results offered by various indicators:
To list the various methods used would be impossible, so I will limit myself to one example; A fairly common technique is to enter and exit a trade based on the crossing of two moving averages.

4. Stop Loss Fixed To A Certain Number Of Pips

The stop loss is set at a certain number of pips from the opening portion of each position. This is an ordinary technique, where the distance is fixed and equal for each trade, such as 20 pips. You should preferably exclude this type of stop loss since there are some important gaps.

First, it disregards the fact that volatility varies over time and is never fixed. Generally, the shorter the time frame used, the greater the possibility that the volatility changes.
Secondly, it is not connected to the reality of the markets: it does not consider resistance and support or other guidelines which may provide an assessment of the graph.

The only people who I think can use a fixed stop loss technique are experienced traders who intend to work with a very short-term scalping technique, while maintaining a very tight stop loss.
Choosing an option or the other, would simplify what cannot be simplified. Every trading system, and each trade is a special case.

I hope this short article has helped you to check your initial stop loss methods and make good use of them, so you can greatly improve your trading outcome.

To your success,
Jonny Tyson

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