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Managing Stops Like a Professional

By , Forex Trading Instructor
19 September 2013 16:47 GMT

When developing a new strategy, many traders only focus on how to place their entries. While planning an entry is important, traders need to reserve time to focus on risk management. We often get so caught up in this process of entering into the market that we forget that once we enter into a trade, we then have to manage it.

  • Risk Management
  • Setting Stops
  • Market Example

The key to risk management lies in using a series of entry orders once we decide to enter into a new position. The first order everyone should become familiar with is a Stop order. A Stop order is a position set away from the market, designed to close out a trade if it moves against you. While no one intends to take a loss when they enter into the market, it is always a possibility. If you’re trading with a Stop, this allows you to exit a trade at a pre-determined point. This action will free your capital up to look for other trading opportunities.

Learn Forex – Entry Order Menu

Managing_Stops_Like_a_Professional_body_Picture_2.png, Managing Stops Like a Professional

(Created using FXCM’s Marketscope 2.0 charts)

Setting Stops

A Stop order is easy to manage through FXCMs Trading Station software. Stops can be set though the “Advanced” tab when creating an entry or market order. Once selected like the image above, traders can check the stop box then select the price for their order. Once this process is completed and your entry is executed, your stop will also be pending and waiting for execution. Once you are familiarized with how to place stops, traders should consider where to place them. Let’s look at an example.

Below we can see the USDCAD and its current downtrend. As price is decreasing with the trend, the current highs on the chart are moving lower as well. Traders looking to trade with the trend can set stops above the previous high. In the event that price exceeds this value, traders would at least temporarily assume that the trend has stalled. This is a great point to exit any existing positions and then look for other opportunities. As you can see, setting a stop order does not have to be a difficult process.

Learn Forex – USDCAD Downtrend

Managing_Stops_Like_a_Professional_body_Picture_1.png, Managing Stops Like a Professional

(Created using FXCM’s Marketscope 2.0 charts)

The example above is just one ways out of many that traders can use when selecting stop placements. It is important to understand that no single method of limiting risk is “better” than the other. The key is finding a method of exiting the market that is easily applied and repeatable so traders can stay consistent in their approach. That way when trades do go against, we don’t panic and exit the market as quickly as possible. Doing this will bring you one step closer to trading like a professional!

---Written by Walker England, Trading Instructor

To contact Walker, emailwengland@fxcm.com. Follow me on Twitter at @WEnglandFX.

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19 September 2013 16:47 GMT