Stop Loss - The True Key to Forex Trading Profitability

[quinn rithi]

The majority of educational materials aimed at folks who want to trade Forex  Forex Millennium Review  online deals with entry points and trade selection. The beginning Forex trader believes that he or she needs to learn how to "pick winning trades" in order to profit from the currency markets fluctuations. In my ten years as a trader and educator, I have come to believe that these "front end tactics" can of course add to the bottom line, but that much more value is created by working on your "back end" or loss prevention strategy.

Many Forex traders can get confused when trying to set stops as they are more focused on not losing money then the mathematically correct choice for a given currency scenario. The rule of thumb that I employ when choosing my stop loss level is a simple one...

First, I define my market opinion, then seek out the price level at which that opinion would be disproven. For instance, if a trade were to set up as a long based on a test of support, then it can be said that your bias is that..."The currency market I am analyzing has hit support and will now rally." If this is the case, it can be assumed that is that support is broken, the initial trade theory is disproven.

On the other hand, sometimes you will find that your opinion of the Forex market may be time based. Perhaps you think that the market is about to make a big move as the Asian session begins. If the Asian session begins and after an hour nothing has happened, then you can take that as a failure of your prediction and exit your positions in the Forex market as that "time stop" is taken.

The third type of protective stop loss order that I use s simply an arbitrary one. Let us say that I am watching a market fight to change its trend. If I think that the market will rally now without looking back, I might try to define what I think the chances are that the price of the currency pair I am trading will whipsaw 10, 20, or 30 pips. I would then pick an arbitrary level that I feel offers the best risk to reward profile and then place my protective stop there.

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