Logical Forex Exchange Stop Placements

Logical Forex Exchange Stop Placements

Forex trading is all about probability and this means that the trader can sometimes be wrong.  When you are wrong there are two options open to you.  They are to go down with the ship or close your position and take the loss.  This is why traders view stop orders as an important tool.  There are many traders that hold onto positions for too long compounding their losses.  By having a correctly placed stop order you can stop your trade losing you too much.  There are a few logical ways that you can use stop orders that you should be aware of.

Placing a Hard Stop

The hard stop is the simplest one to place on the forex exchange.  The hard stop is placed a specific number of pips away from the entry price.  The problem with hard stops is that they are not very logical in dynamic markets.  It is important that you take market conditions into account when you place these stops because you should not place the same 50 pip stop in volatile and quite conditions.  The overall risk of the market affects the stop you should be placing.

The Forex Exchange ATR % Stop

The ATR or average true range percentage stop is used by many traders because of the width of the stop.  ATR is the measured volatility of the market over a stated amount of time.  14 is the length that is most commonly used and is the length many traders use for RSI and stochastics.  The higher the ATR the more volatile the market conditions are.  By using a percentage of the ATR for your stop you are creating a stop order that is dynamic and able to change with market conditions.

It is logical for traders to take volatility into account when they are placing their stops.  While getting stopped out is a part of trading you can limit the number of times this happens to you with ATR percentage stops.

Multiple Day High and Low

Position and swing traders should look at using the multiple day high and low stop method.  While this stop is simple and enforces the patience needed for this kind of trading it does increase the risk of the trade.  If the open position is long then the stop is placed at the day’s low which is predetermined.  If that day has a large range then the risk of using this stop increases and this often puts the trade out of a traders risk management plan.

Indicator Stops

Indicator stops are a logical trailing stop and it can be used with any timeframe.  The idea behind this stop is that the market displays a sign of weakness before you need to get out.  The main benefit that traders get from this stop is patience.  There is less chance of you getting stopped out of the market with this stop.  However, like other stops there is an increased risk with this method.  With long-term trading it is logical to use this method as it makes more sense than trying to pick a top to exit on.

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