The Essential Role of Stop Loss in Forex Trading Strategy

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Why set a stop loss? If you have doubts about this question, then it proves that you have not yet entered the door. Any successful forex trader will use protective stop loss to trade.

If you trade without a protective stop loss, then the end of your account is not far away. Stop loss can not only help you reduce losses but also help you win, such as trailing stop loss in trend following trading greatly increases the profit margin.

If you chase 20 pips of profit with 10 pips of risk, then the risk-reward ratio of this trade is 1:2. This is like me and you flipping a coin to gamble, if it is the back I pay you 10 yuan, if it is the front you pay me 20 yuan.

Then I would like to participate in this game because as long as the number of times is enough, I will be the winner. This is the issue of the risk-reward ratio.

The main purpose of using stop loss is to reserve a way out of your mistakes. Trading is a probability game after all, you can’t be too confident, you may lose or win in every trade, you can only control the overall probability, and you can’t decide the profit and loss of a single trade. In the case of local uncontrollability, you must use stop loss.

The price is likely to reverse sharply after triggering your entry order, if you do not set a stop loss, the consequences are unimaginable, the loss of funds is secondary, and the blow to confidence is the biggest failure.

If you lose tens of pips in a few minutes, what would you think, at that time you might think that it was just not setting a stop loss, and it had nothing to do with the ability to analyze the forex market, but the huge loss is always a shadow in the depths of your heart, it slowly devours your confidence, no matter how you comfort yourself, it is powerless.

To prevent the blow to confidence, we must limit the large losses. Data trading has four results:

First, the exchange rate still does not respond after the data is released, and your order is not triggered, this situation is rare.

Second, the exchange rate unhesitatingly walks out of a one-sided trend after the data is released, then you either get 20 pips or lose 10 pips.

Third, the exchange rate triggers one side of the order after the data is released and then reverses sharply to trigger the other side of the order, so you first lose 10 pips, and then get 20 pips, netting 10 pips.

Fourth, the exchange rate first triggers one side of the order and then reverses sharply to trigger the other side of the order, and then reverses again, forming an N-shaped forex market, both sides of the order are triggered and stopped, losing 20 pips in total. The first and fourth situations are rare. The amazing thing about this strategy is that you only need to bear 10 pips of risk.

Most forex traders often place 30-100 pips of stop loss, so they will think that 10 pips of stop loss is nothing. Another thing to note is that in the above trading strategy, we firmly believe that your forex broker provides you with a 5-pips spread.

Therefore, if your broker’s spread is more than 5, then you are not adding or subtracting 10 pips, but adding or subtracting 15 pips or more. If your spread is high and you still use the method of adding and subtracting 10 pips to set orders, you will be shaken out of the forex market by some noise movements.

Therefore, for platforms with high spreads, we need to increase the amount of addition and subtraction. In addition, those currency pairs with high spreads, we do not recommend in data trading.

You set the entry order in a smaller range, because if your broker provides you with a 5-pips spread, then you added and subtracted 5 pips of movement space.

If your broker provides you with a 3-pips spread, then you will feel better if you use the same parameter settings, because it filters out more false signals, although it only adds 2 pips of movement space.

In addition, I use the candlestick at 8:30 Eastern Time in the morning to trade, which is just an example. There are many data releases at other times, and we use this time as an example for convenience.

According to our trading consolidation, we will sit in front of the computer at least three times a week at this time to complete the forex trading.

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