There are many concepts in Forex that are overlooked by the traders. One of them is the proper placement of stop-losses. If you ask the traders, you will find that most of them do not have a proper idea. They believe it is some kind of tool that is used by traders to decrease their risks in trades. If they can place it properly, the money they have invested will be safe. They also believe that wider stop-loss put your money at risks. It will not close even when the trends are moving against you because you have set it at a bigger position. This article will try to explain this misconception that is popular among the UK traders. It is believed by them to be the right concept and if you do not have the idea, you will also believe them to be the truth. You will be amazed to find that your risks do not depend on increasing or decreasing the size of stop-losses. It also depends on how to position your trading size. This article will explain the nature of stop-losses when they are placed in a bigger position and if they increase risks.
Scaling your lot size
Scaling your lot size is the first thing you need to learn to use a wide stop loss. Those who use tight stop-loss always use a big lot to maximize their profit. They are often known as scalpers in the Forex market. But when you are using wide stops chances are very high to carry your trade for more than one days. This is where things become complicated. You can’t use the same lot size to trade the market. Scale down your lot size so that the overall risk factors don’t exceed more than 2% of your account balance.
Use of candlestick pattern
Candlestick pattern trading strategy is nothing but price action trading. If you want to use a wide stop loss in an efficient way, it’s highly imperative to learn about the different formations of the candlestick. Before you analyze the charts in your trading platform, make sure have a clear knowledge about the most reliable candlestick pattern. Use them as your bench and set the stop loss without exceeding your risk tolerance level. It might sound a complicated process but after demo trading this strategy, you can easily start using the wide stop loss.
It depends on the position size
The first thing you need to know is, your risks do not depend on what positions you have set the stop-loss. For example, you can be trading in the Asian market and you have set your stop-loss far away from your opening. It does not say that you have increased the risks. The money that you have risks per pip depends on the position sizing. It is the volume of your account that tells how much of your money is at risks. It is the volume of a trade, the amount of money you place on a single trade.
If you set your stop-loss closer, it was supposed to say you are safe in the volatility but what happens when the position sizes are bigger. It says that every pip movement is now worth greater risks. The traders try to set the position size at the smallest unit, to decrease their risks in per trade. If you invest all your money into one trade, you cannot go home with a profit. The most experienced traders also do not take the risks because they cannot trust the trends. Even if the stop-loss is only 10 pips away, a bigger position size will blow away all your money before it reaches your stop-loss. You need to set the position size to a small unit so that every pip movement costs you less money. It will also decrease the profit but saving your capital is more important.
This is a guest contribution by Charles Dearing.