How to Set a Stop-Loss in Forex Trading?
There is no sure win for in forex trading, and sometimes it is hard to avoid making some wrong decisions. Therefore, Stop Loss is very important to all investors, even for professionals such as Warren Buffet! In the unpredictable investment market, it is inevitable that investors will face varying degrees of risk. Therefore, how to control the risk will determine who is the final winner. This article will introduce the method to set a stop-loss on the MT4 platform, as well as the principles and techniques of stop-loss setting.
What is stop-loss? Why is stop-loss important?
Before we get into stop-loss, let’s start with a story called the Alligator Principle.
“When we run against the tide today and face paper losses, it’s like being bitten by a crocodile in the leg. If we continue to add funds or adjust the positions, it will be all in vain as the more your struggle, the more alligator takes you in. The right way to do at this time is to sacrifice your leg, which means stopping the loss immediately to avoid further damage.”
This short story basically explains the meaning and importance of stop-loss.
Traders who do not set stop-losses tend to follow the market closely and will make a judgment and decide whether to take profit or stop loss regardless of the market move. But is this really the case? In fact, when these traders make decisions, they often overreact and close their positions early for fear of giving up the gains, while unwilling to accept the losses and constantly look forward to the day of the price correction, thereby losing every penny they have in the end. This not only proves the principle of entering out of greed and leaving out of fear but also shows the problems faced by most traders.
The problem is, what usually happens to us is that when we encounter some short-term adverse moves in a long-term trend, setting a stop loss may cause us to leave the market early, thereby missing the profits after it recovers from correction.
However, we simply cannot always tell which one is a market correction. If we don’t have a stop-loss mechanism, the best result for us in the medium to long term is to break even rather than making a big profit. Only if we have a set of stop-loss strategies suitable for ourselves and apply them regularly in the actual trading, we can effectively control the risk of big losses, and pursue steady profits in the long run. The first rule of investment is always avoiding loss, not making money.
So, how to set stop loss, is important for every investor.
How to set stop-loss?
Before we get into the basics of risk control, let’s talk about how we set a stop-loss for trade orders on the MT4 platform.
Scenario 1: set stop-loss when opening a position
When we place new orders to establish positions, we will see the confirmation at the bottom of the screen. Before opening the position, we can enter a custom value in the “stop-loss/profit” column in addition to position size. When the market falls to the price we set, a stop loss operation will be triggered automatically.
Screenshot 1: How to set stop-loss when opening a position
Scenario 2: Set stop-loss in an existing position
To set a stop-loss on an established position, we can first open the terminal page at the bottom, then right-click on the order and select the option “Modify or Delete Order”. Then, you will see the picture below. Now, you can set a stop-loss for the order.
Screenshot 2: How to set stop-loss in an established position
Tips and methods for setting stop-loss
Having said what a stop-loss means and how to set a stop-loss manually, here’s how to set a stop loss cleverly. After all, the stop-loss strategy is a key part of forex trading, as well as an art of investment.
If the price is set too far to the market price, it will be of limited help for controlling the risk; if the price is set too close, investors can be kicked out of the market at any time.
Beginners can simply set the stop-loss following some basic principles. Although no special skills are required, these principles are absolutely helpful to the overall trading strategy and practice.
1 / by price distance
Calculated based on the entry price, a stop-loss is required whenever a predetermined distance is reached in an unfavorable direction. For example, a stop-loss can be placed at 30 pips below the entry price. For a long position on EUR/USD with a buying price of 1.1300, a stop loss can be set at 1.1270. Similarly, a stop-loss can be set at 0.3% below the entry price. In other words, if the price drops 34 pips to 1.1266, the position will be closed.
2 / As a profit/loss ratio
The stop-loss distance should be proportional to the stop-gain distance. If a trade targets 30 ticks of profit, the stop-loss distance should not be more than 30 ticks. This can be set as one-to-one (30 ticks for stop profit and 30 ticks for stop loss) or two-to-one (30 ticks for stop profit and 15 ticks for stop profit), or as a ratio between the two.
3 / As a percentage of capital
The loss of each transaction should not exceed a certain proportion of the funds in the account, and the value of 5-10% can be used as a reference to determine the rule of stop-loss. The more money we have in the account, the more pressure we can bear. For example, with an account of $1,000 and a long position of 10,000 euros, the stop-loss distance shall be capped at 100 ticks, or a loss of $100, and the loss of a transaction will not exceed 10% of the capital.
4 / With technical analysis
Investors who specialize in the technical analysis would usually set stop-loss levels based on the above criteria and logic in combination with chart analysis. The common methods include drawing trend lines, observing trend patterns, and positioning with technical indicators such as average line, so as to determine reasonable support and resistance level, and set stop loss/profit accordingly. Technical indicators can also be used in statistical classes such as ATR to measure the recent volatility of some trading indexes to avoid setting the improper stop-loss distance. In addition, ATR and other statistical indicators can also be used to measure the recent volatility of some trading indexes to avoid setting the improper stop-loss distance.
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.
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