7 Stop Loss Problems in Forex Trading and Learn How to Fix Them
Stop loss orders are the most controversially discussed trading concepts, and there are a lot of mistakes and wrong ideas floating around the concept of stop loss orders. In this blog, we take a look at general stop loss principles that can help all traders improve how they approach their trading quickly.
1. Not Having a Stop Loss
Let’s begin with the biggest problem of not having a stop loss in the first place. If you are a trading spot, then there is no reason for why you should ever be in the trade without a stop.
A trade signifies an idea/opinion about a potential scenario that is based on strategy rules and the chart context. Your stop loss is the place where your idea is proved wrong, although many traders see stops as their opponents. A trader who is in a trade without a stop has not done his analysis, and he often tries to avoid to be proven incorrect.
2. Sizing Positions is Impossible Without the Stop Loss
If you don’t have a stop loss, you can’t size your position, and you can’t control risk. Many people will argue otherwise, but it is the way it is. The stop loss distance defines how many contracts you have to buy/sell to achieve the certain risk.
Without the stop, it does not matter how big your position is because your risk will be all over the place.
3. Mental Stops Don’t Work in Forex Trading
Forex Traders who use mental stops often do so because of the flexibility mental stop loss orders give them, or so they tell themselves. A mental stop loss does not have a single advantage over a hard stop, traders who use mental stops stay in the losing trades longer, size positions wrongly and increase their risk unnecessarily.
4. The Wrong Stop Loss Placement Sequence
Always have to recognise where your stop goes before you enter a trade. The stop loss distance then shows you how many contracts to buy/sell for your desired risk exposure.
In Forex trading, many people make a mistake of buying the fixed amount of contracts and then fixing their stop based on the risk they want to have. Then, their stops end up in random places that make no sense in the market context.
5. Obvious Stops Without Breathing Place
How often did you enter a trade and thought the setup looked excellent and then the price went straight to stop loss before going to your take profit without you? It is a common situation many traders deal with on a daily basis and often traders then think that they should trade without the stop.
If you repeatedly see that your stops get hit correctly before price reverses into your original direction, it’s very apparent that you place your stops at levels that other traders also use. Mainly if you trade the obvious price action patterns, it’s straightforward to spot amateur entries in Forex trading, and the experts know where the stops will be.
6. You Open Your Stop Loss
This is another cardinal sin of stop loss placement. When traders are not ready to take the loss, they often open their stop loss orders to allow their trades to turn around’ because they still believe that their analysis was right.
This is especially prevalent when traders don’t use reasonable stop levels. If you have problems with opening your stops, close your Forex trading platform once you are in a trade and then remove yourself from the screens. It helps you to build trust in your system in the beginning.
7. Stop Trailing and Break Even Stops
Stop trailing comes with good purposes initially, it’s very easy to ruin a potentially good trading strategy by wrongly trailing stop loss orders. The idea of a trailing stop is it to protect your position and stay in trades longer when you catch the momentum wave.
The reasons why trailing stops generally don’t work is because traders trail their stops based on fear and greed they move stops too fast because they want to create a ‘risk-free’ trade and avoid giving back profits.
Just pull up any price chart, and you will see that price always moves in waves a trader who trails his stops too fast and too close to the price does not take this natural behaviour into account.