Currency Day Trading: Are Your Stops Killing You?
Currency day trading generally involves moving in and out of the market within a short time, from a few minutes when the market is moving quickly to a few hours, in order to take a small number of pips, perhaps 5 to 20 in the case of the scalper, or 25-40 in the case of a longer term move.
Wrongly positioned stops can really cause trouble for the newer trader and result in needless losses which in time can kill the account.
Five Guidelines
Here are five guidelines when setting stops for currency day trading which can help avoid much grief:
1. Don't Set Your Stop Too Close To Entry
Don't set your stop too close to price action so a spike in price can take out the trade before price continues in the direction the trader anticipated in the first place. Allow some breathing space.
2. Don't Make The Stop Too Large
Don't make the stop too large in relation to the profit target resulting in a poor risk reward ratio. (see next point)
3. Don't Set An Arbitrary Stop
Rather than setting the stop according to an arbitrary number of pips such as 20 or 25, study your charts and observe the next levels of support or resistance above or below your entry point and set your stops accordingly.
It could be by setting your stop at 25 you are just below a key level of resistance which price is very likely to come back and test. It may just touch the resistance level going past your stop and then continue on down. How frustrating when you entered a short trade and you were right all along as to direction. Much better to put your stop the other side of the resistance line so it acts as a protection level.
Of course, if doing that means your stop will be 30 or 35 pips away from your entry level you may choose to sit on the sidelines and let this one go. The risk would be too great in relation to your profit target. What's the sense of risking 35 pips to try and gain 20?
4. Avoid Round Numbers
Another common error newer traders make is to set a stop at a round number. Round numbers are psychological barriers in the minds of many traders and price often will come and test a round figure.
Some currency pairs, e.g. GBP/USD seem to react frequently when reaching key levels such as 1.9700, 1.9800 etc. It makes no sense to put your stop at that number as there is a high chance price will just come back to touch it or go beyond it by a few pips before reversing.
5. Don't Move Your Stop Back Once The Trade Is In
A major mistake newer traders make is moving the stop back once the trade is in progress. This really is a NO NO! As price comes dangerously close to the stop. the newer trader gets nervous and thinks, "I didn't leave enough breathing space. I'll just move it back another 5 pips." This habit spells disaster when currency day trading.
Think out your trade carefully before pulling the trigger. Spend just as much time calculating the stop position as you do the entry point. Once you have set the trade with carefully researched entry, stop and limit points, put it in, and leave it!
Just mastering the self-discipline to follow this guideline strictly will save you so much grief in the future.
Handle Losses Professionally
Finally, if your stop is taken out, learn to handle the loss in a professional way. Losing is part of the currency day trading scenario. You have to get used to it. Look upon it as paying the rent!
As long as you stick to your solid currency day trading system you will have more winners than losers over time and your account will gradually and consistently grow.
Master the art of controlling your stops using the 5 guidelines above and live to see another day when currency day trading online!
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