Better Stops in forex trading

Placing Better Stops in forex trading

The importance of well-placed stop orders exchange trader can not be over emphasized. The margin percentage is required in a typical exchange account is so small that fully leveraged trader can easily lose a substantial amount of net worth of a position, if you move too far in the wrong direction. The name of the game is risk control and a key tool to protect your account from a significant loss of order and harmony.

That being said however, I know some traders who never claim to place stops. Usually the reason for this is that their trades are very short (of the order of only a few minutes) and they are seen in the market throughout the trading, finger twitching on the trigger ready to exit saving the first sign of trouble. Even when you prevent this by arguments that the station will provide the discipline needed to avoid the "deer in headlights" syndrome or that it will cease to protect them when their system crashes, I still meet strict resistance to using stops. Finally I came to understand that this resistance can stem from the frustration of being stopped by good trades too frequently.

And frustrating it is! In 2004 I opened my first account conversion with just a few hundred dollars in order to test the waters a bit. I figured, "Well, how hard can it be? I just set my goals three times the distance to stop my 1:03 so you have risk / reward ratio. Then, all you have to do to make profit right more than 25% of the time of my trades. Any dolt can do that, right? "So this dolt obviously can not, because about a dozen trades later that I can hit my goal twice. Every other trade was stopped out. Unbelievable. What happens?

There are several possible explanations for this. The first and most obvious is that I was simply placing stops too close. This can allow the random "noise" of the price movements caused me to stop. Another possibility is that dealing desk or my broker or some other serious player in the market is engaging in "Stop hunting". I've written a complete article on this topic already, but basically it involves market players who try to push the price to the point where they think many guests loss orders will be activated. They do this so that they can enter the market at better price for themselves or cause snowballing move in a direction that benefits from their existing jobs.

Let's tackle the first issue of setting stop orders too close. Merchants can do this for several reasons. Some may do it because they are more risk control rule includes the maximum loss they are willing to take, while others are simply choosing inappropriate places on the table to stop. We will look at each of these cases in detail.

Stop Location determines the position size and not vice versa!

Money management and risk control rules are excellent, but make sure you apply in the correct order. Let's say you have a rule that you risk no more than 1% of account equity, or $ 50 per trade. You decide to take a short position of 10.000 NZD / USD 0.6600, meaning that any movement of the PIP will be $ 1.00. So your stop should be 50 pips at 0.6650 back right?

Well, actually ... not really. This is backwards thinking. We took our money management rule and our position size and used these values ​​to calculate our stop loss point in the market. But it does not really make sense because why marketers should care what your rules and position size?

We really should be setting the stop loss of some logical place on the table. Suppose we look at the chart and see that a good place to end, will actually be 80 pips at 0.6680 back (we'll discuss how to find good places for the next stop). This is a problem, because if our position size is 10,000 then our potential loss is $ 80 which violates our money management rule. It is not acceptable, so how can we put a stop to stop at a logical point of 0.6680, while still only risking $ 50? Well, we are only three variables to work with and we've already decided on our maximum loss stop location. The only other thing that can change the position of greatness, and that's what you should do. If we reduce our position size until 50/80 x 10.000 = 6.250 then we are all set. We can put our guests in a logical place, and even in our rule of only risking $ 50.

In summary, let us stop Location Determine your position size and not vice versa!

When to stop?

Each merchant will have different methods for placing stops, but the common theme among many of them that end should be in place where it will be obvious if you hit the wrong direction for trade. Many traders only look for the nearest high / low or resistance / support line and place the stop on the other side of it. However, prices exhibit false breakouts all the time, so just because one of these obvious support / resistance points is broken does not mean that the price will continue in that direction.

So how do you find the place that suggests that price is "obviously" going against you? Do this by pretending to think about setting up trade in the other direction. What kind of price action or signal indicator will tell you that trade is moving in that direction? What you will need to confirm? For example, suppose your actual trade is going to be a long position in USD / JPY at 118.40. There is a recent double bottom around 118.10, and most traders are likely to place their stops just under it. However, you begin to think about what will make you want to go short pair. You might think: "Well sure, if it breaks the double bottom that would get my attention, but it is not enough. It probably will have to first establish the route slightly to lower high and then move down past this area consolidation here 117.90 for me to be really convinced of the downtrend. "Now you've found a place where the price should definitely if you're right for a long trade. So put away there, and there will be less chance of it getting hit.

Of course you do not need to use chart patterns to do so. You can use all the indicators that you are comfortable with to go through a similar procedure. Suppose that as a moving average. You can decide that if the 10 bar MA crosses below the MA 50-bar then it will definitely mean a downtrend. As you look at the table, you will see that this crossover will not happen until the price reached about 117.75, so maybe it's a good place to stop. You can use Fibonacci levels violation, Bollinger bands, or many other tools to go through a similar thought process.

The point is to keep the guests in a place where you will be fully convinced that the price goes in the opposite direction of your trade. Do not put it in obvious places with any other stop!

Do not fight the "stop hunters." To join them instead!

One of the main reasons why you do not want to stop in an obvious place just behind the local Peak / Valley or a nice round number is that hunters often stop to try to cause the stops in these locations. I discussed how and why they do this in a previous article, so now let's look at how you can take advantage of the practice itself.

In the previous article, I described where trade was convinced that AUD / USD is going to head much lower than the 0.7540 area. There was a local peak near 0.7570, and put them cease to exist and are removed when the price spiked up past that point. Price turned back and got another short position around 0.7530. Being a glutton for punishment I guess, I put my new stop at 0.7580 which was just above the spike that I removed before. "There's no way it could happen twice in a row," I thought. OK. The price spiked above 0.7580, pulled me, then headed South again!

What could I have done instead? Knowing that the last peak will be obvious place for traders to place their stops, to avoid that area like the plague. There was a brief consolidation area remain at 0.7620 area, and less obvious and safer place for my guests would be above that. But then I would be taking a much greater risk and should reduce my position size to compensate. Unless ... unless you can somehow get a better entry!

That's where the idea of ​​using hunters to stop my preference comes in. Knowing that everyone probably had to stop at 0.7570 or so, and knowing the guest hunters (sometimes) work, I could make an educated guess that they will try to push the price out there to those stops. So instead of entering the current market price of 0.7530, could put a row of input and only 0.7570 waited patiently for me to stop hunters store by clicking the price up there. You can then enter into a short trade at 0.7570 by knowledge along with heavy hitters instead of being removed from my position at that moment with all the sheep.

The key to this is to have patience to wait for better entry. Certainly there are some variations on this tactic too commercial. If you are not sure that hunters will stop trying to push the price of your hope for the access point (or if you are not sure that hunters stop there at all), you might want to insert part of the current trading price, and place OK, part of it the better entry price. That way, if you stop hunters do not adjust their clever plan to exploit them, will still be in trade for a smaller amount. This also compensates for the fact that your station is away.

Conclusion

So to summarize:

1st Select your stop location, and then base your position size, and not vice versa.

2nd To find a good place to end, pretend that you are thinking about trading in the direction of harmony. Where would the price should be to convince you that it's really moving in that direction?

3rd Do not put your stops at obvious places like just around the highs and lows, just beyond the obvious support / resistance levels, or in Nice round numbers.

4th Use stop hunting activity to take advantage by putting your entry for near where you think most people put stops.

I hope this helps better place stop orders and avoid getting taken out of the market so often, especially when you're right direction for trade. Perhaps those of you out there who are sworn Off stops using foreign exchange market will reconsider as well. Good trading to you!

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