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Methods of Setting Stop Loss Orders In Forex Trading

Traders using a Forex trading system must have mathematical calculations that reveal where this stop loss order must be placed.


A Forex trader can also place a stop loss order according to the forex technical indicators that are used by forex traders to set these stop loss orders. Certain technical indicators use mathematical equations to calculate where the stop loss order should be set so as to provide an optimal exit point for open forex trades. These forex indicators can be used as the basis for setting these stop loss orders.


Other forex traders also place these stop loss orders according to a predetermined risk to reward ratio. This method of setting is dependent upon certain mathematical equations. For example a ratio of 50 pips stop loss can be used by a Forex trader if the trade has the potential to make 100 pips in profit; this is a risk reward ratio of 2:1


Others just use a predetermined percentage of their total forex trading account balance to calculate where to set these stop loss orders.


To set a stop loss order it is best to use one of the following methods:



1. Percentage of forex trading account balance

This is based on the percent of forex account balance that the trader is willing to risk on a single forex trade.

If a forex trader is willing to risk 2% of their forex account balance then the trader determines how far he will set the stop loss order level based on the position size that he has bought or sold.


Example:

If a forex trader has a $100,000 forex account and is willing to risk 2%



  • If the trader buys 1 contract
    1 pip = $10

    Then setting stop loss order at 2%

    2% is $ 2,000

    2000 /10 = 200 pips

    Stop loss = 200 pips




  • If the trader buys 2 contracts
    1 pip = $20

    Then setting stop loss order at 2 %

    2% is $ 2,000

    2000 /20 = 100 pips

    Stop loss = 100 pips




  • If the trader buys 4 contracts
    1 pip = $40

    Then setting stop loss order at 2 %

    2% is $ 2,000

    2000 /40 = 50 pips

    Stop loss = 50 pips




2. Setting Stop Loss Order using Support and Resistance Levels

Another way of setting stop loss orders is to use supports and resistance levels that form on the forex trading charts.


Given that stop loss orders tend to congregate at these support and resistance levels key points, when one of these levels is touched by the forex price, many other stop loss orders are set off, like dominos. Stop loss orders tend to accumulate just above or below the resistance or support levels, respectively.


A resistance or a support level should act like a barrier for price movement and forex price should not move beyond these points, this is why these support and resistance levels are used to set stop losses, if this barrier is broken the forex price movement can go towards the opposite direction of the original forex trade trend, but if this barriers (support and resistance levels) are not broken the price will continue moving in the intended market direction.



Stop Loss Level Order Setting using a Resistance Level - Setting Stop Loss Orders using Resistance Levels

Stop Loss Level Setting Using a Resistance Line - Setting Forex Stop Loss Orders Using Resistance Levels

Setting forex stop loss order - Stop Loss Order Set above the Resistance Level



Stop Loss Level Order Setting using a Support Level - Setting Stop Loss Orders using Support Levels

Stop Loss Level Using a Support Line - Setting Forex Stop Loss Orders Using Support Levels

Setting forex stop loss order - Stop Loss order Set below the Support Level



3. Forex Trend Lines

A Forex trend line can be used to set stop losses where the stop loss order is set just below the trend line. As long as the trend line holds the trader will be able to continue making profits while at the same time set this stop loss order that will lock his profit once the trend line is broken.

Stop Loss Level Set Below the Forex Trend Line - How To Set Stop Loss Orders Using Forex Trend Lines

Setting order below the trend line - How to Stop Loss Forex Orders Using Forex Trend Lines

Example of where to set this stop loss order using forex trend lines.


 

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