Let’s face it. The market will always do what it wants to do, and move the way it wants to move. Every day is a new challenge, and almost anything from global politics, major economic events, to central bank rumors can turn currency prices one way or another faster than you can snap your fingers.
This means that each and every one of us will eventually take a position on the wrong side of a market move.
Being in a losing position is inevitable, but we can control what we do when we’re caught in that situation. You can either cut your loss quickly or you can ride it in hopes of the market moving back in your favor.
Of course, that one time it doesn’t turn your way could blow out your account and end your budding trading career in a flash.
The saying, “Live to trade another day!” should be the motto of every trader on Newbie Island because the longer you can survive, the more you can learn, gain experience, and increase your chances of success.
This makes the trade management technique of “stop losses” a crucial skill and tool in a trader’s toolbox.
Having a predetermined point of exiting a losing trade not only provides the benefit of cutting losses so that you may move on to new opportunities, but it also eliminates the anxiety caused by being in a losing trade without a plan.
Less stress is good, right? Of course it is, so let’s move on to different ways to cut ’em losses quick!
Now before we get into stop loss techniques, we have to go through the first rule of setting stops.
Your stop loss point should be the “invalidation point” of your trading idea.
When price hits this point, it should signal to you “It’s time to get out buddy!”
In the next section, we’ll discuss the many different ways of setting stops.
There are four methods you can choose from:
- Percentage stop
- Volatility stop
- Chart stop
- Time stop
Ready? Let’s get started!