Beware of Bad Stops

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Stops are one of the most important forces in forex trading, both where the market places its stops and where you place yours. In this article, I will focus on where to place your stop.

There are several ways traders place stops. Some base it on the amount they are willing to lose on a trade. Others base it on the % of capital they are willing to risk on a trade. Others use a fixed number of pips (e.g. 10, 20, 50 pips, etc) for a stop.

I take a different approach.  A stop should not just be based on what you are willing to lose. A stop should be treated as an insurance policy. It needs to have a meaning to the way you trade, keeping you in a position when right and telling you the trade idea is not working out when it gets triggered. 

As long as the stop is within your risk profile, then you can execute the trade. If the stop (risk) is beyond your risk profile and too costly, then either look for a better setup or ignore the trade.

So where should you place your stop? I am going to show you how I do it and then you can decide if it suits your trading style.

I use the Amazing Trader, our proprietary trading program, to enter a trade and place a stop that has a meaning to the trade. I look to identify my stop first and base the entry off the stop. As long as the stop stays intact, the trade is valid.

Step one: Recognize a trading pattern highlighted by the Amazing Trader's proprietary trading lines (in this case bearish)

Step two: Identify where to place a stop at the most recent Amazing Trader blue or red trading line (as the case may be) 

Step three: Make sure the stop vs entry is within your risk profile

Step four: Enter a trade with the stop identified in Step two.

To sum up, there is no worse feeling than having the right trading idea but getting stopped out because of an ill placed stop.  What I mean by that is a case where a stop was placed based on how much you are willing to lose on a trade rather than at a level that would get triggered only if the trade idea was not working out as planned (i.e. stop with a meaning).

To sum up, I have showed you how I trade using stops. I will leave a link below if you would like more information on my approach. In any case, keep in mind the difference between placing a stop based solely on how much you are willing to risk vs. using one that has a meaning to your trade. 

Jay Meisler


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Currencies , Forex , FX Basics

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