Forex Secret Tips #52 -- Is Your Stop Loss Safe?

Determining and entering a stop loss is a serious discipline for each Forex trade you take. However, it appears that some stop loss levels are safer than others, in that they don't get hit usually. Nothing could be further from the truth, as revealed in this article...

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Forex secret tips, Forex trading, Forex stop loss, stop loss, running stop loss, stops run

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Have you ever wondered why the stop loss levels you have set for your Forex trades get hit before the market moves in your intended direction leaving you out in the cold? Assuming those stop loss levels have been derived technically (from charts) in an appropriate manner, was it due to pure coincidence, bad luck or misreading charts? Is it even safe to enter stop loss orders?

This article introduces the market phenomenon commonly referred to as "stops being run" -- the tendency for prices to move towards chart points upon which traders base their stop levels. It also discusses the thinking behind why stops are important to the Forex trader.

Getting your Forex trades stopped out invariably happens to all Forex traders, novice or otherwise. It is often frustrating to see a supposedly good trade being ruined by market action that somehow comes for your stop and then bounces off right away to trend strongly. Stories abound regarding the so-called "invisible hands" of the market that are able to shake off weak players. Some talk about stop loss orders being visible in the trading platforms and hence vulnerable to being hit.

Yet others believe this is a way the market feeds on itself by luring players back in after kicking them out. Upon seeing that prices start to move in their intended direction, some traders would believe they were right in the first place about their trades and rejoin the market, thus creating more demand and providing the impetus for a good price move. This seems like a plausible explanation for the strong trends that often occur after stops are run.

If your Forex trading platform is such that your broker takes the opposite side of your trade, there could also be opportunities to push the limits during price spikes such that your stops get hit. Comparing price charts from various brokers will elucidate this nuance; in fact, you will see that not all price bars are created equal. This is the nature of the Forex market, which does not have a centralized exchange.

All things said, should you avoid setting a stop loss for your Forex trade? The answer has to be an emphatic "NO"! Trading without an idea of where you must cut loss is like driving with faulty brakes -- it is dangerous and can potentially cause severe damage to your account and your psyche. Yes, it is quite human to sit on losses (and be praying real hard), but as a serious Forex trader, one of your primary objectives must be to preserve trading capital to fight the markets another day.

The correct way to manage your stop loss is to enter the stop order once your Forex trade has been filled. Better still, enter a contingent order when you originate the Forex trade so as to automate the setting of the stop loss for that trade. Alternatively, if you prefer to watch the market and make do with a mental stop, always write down this stop loss level and ensure you have full visibility of this figure. Also, set an alert signal in your Forex trading platform to remind you when prices approach your stop, say 10 to 15 pips away. This can help you stay focussed and prepare you to exit the position should the market trade to your stop level.

No matter what, the market will go where it wants due to the cumulative effect of its massive participants, each having a different view and vested interest. Remember, while you cannot prevent stops from being run, you must avoid trading recklessly with no pre-determined stop loss level for each Forex trade you take. There are many trading opportunities each day but you must have sufficient trading funds left to participate in the Forex markets. Respecting your stop loss level is one sure way to help you preserve your trading capital and stay alive as an active Forex trader.