Methods of Setting Stop Loss Orders In Forex Trading
Traders using a Forex trading system must have mathematical calculations that reveal where to set stop loss & take profit in forex trading.
A trader can also place set stop loss & take profit orders according to the technical indicators used to set these set stop loss & take profit orders. Certain forex technical indicators use mathematical equations to calculate where the set stop loss and take profit order should be set so as to provide an optimal exit point for forex trades. These forex trading technical indicators can be used as the basis for setting these set stop loss and take profit orders.
Other traders also place these set stop loss & take profit orders according to a pre determined risk : reward ratio specified in their forex trading strategy. This method of setting stop loss and take profit is dependent upon certain mathematical equations. For example a ratio of 20 pips forex stop-loss can be used by a trader if the trade has potential to make 60 pips in profit: this is a risk: reward ratio of 3:1
Other traders just use a predetermined risk percent calculation of their total forex trading account balance.
To set stop loss and take profit in forex trading it is better to use one of the following methods:
1. Percent of Forex Trading Account Balance - How to Calculate Stop Loss and Take Profit in Forex Trading
This method is based on percent of forex account balance that the trader is willing to risk and the risk:reward ratio.
If a trader is willing to risk 2% of account balance then the trader decides how far he will set the stop loss order level based on the position size that he has bought or sold - the trader also use the risk reward ratio to calculate where to set take profit order for this trade.
Example:
If a trader has a $10,000 account & is willing to risk 2%
- If the trader buys 1 contract
1 pip = $10
Then setting risk at 2 %
2% is $200
Stop Loss = $200
If Stop Loss = $200 then using risk reward 3:1 the take profit will be set at $600
2. Setting Stop Loss using Support and Resistance Levels - How to Calculate Stop Loss and Take Profit in Forex Trading
Another technique to set stop loss & take profit in forex trading is to use supports and resistance levels, on the forex trading charts.
Given that stop loss orders & take profit orders tend to congregate at key points, when one of these levels is touched by the forex price, others are set off, like dominos. Stop loss orders & take profit orders tend to accumulate just above or below the resistance or support levels, respectively. Traders should use these levels to set stop loss and take profit in forex trading depending on which side of the trade they are in.
A resistance or a support level should act like a barrier for forex price movement, this is why these resistance and support levels are used to set stop losses and take profits, if this forex price barrier is broken the forex price movement can go toward the opposite direction of the original forex trade, but if this barriers (support & resistance levels) are not broken the price will continue moving in the intended direction. This means that these support and resistance levels can be used as good points to set stop loss and take profit in forex trading.
Stop Loss Order vs Take Profit Order - Stop Loss Order Examples Sell Order Buy Order - Take Profit Order Example Sell Order Buy Order
