Stop Loss Orders
Managing your open trades in the market is crucial and we are not referring to the leverage. One of the greatest difficulties of a trader is seen in placing stop loss and take profit orders. Some are suggesting that stop loss orders are constantly targeted (stop loss hunting) so by employing such orders that means on most occasions losses are likely to be incurred.
To justify the complete removal of stop loss orders, the traders point to the “fact” that once a stop loss order has been triggered by the market the price tends to reverse in the predicted direction of the trade so it is completely logical to remove the stops in order to profit in the market whether is Forex or CFD’s.
The aim of the stop loss order is to predetermine your exposure to the market. Of course in most markets stops are not guaranteed but they are the closest tool you have the predetermine your risk. Whether it is as little as $200 or $20,000, risk management is an essential part in trading.
The stop loss orders are often based on technical levels and not randomly placed. We have created a guide that covers several techniques that are used by trades when it comes to determining the location of the stop loss orders, which you are invited to read.
If you are unable to predetermine your risk you are exposing your entire invested capital to the market. To provide a fair argument, traders that avoid using stops are likely to close their trades manually with a loss or hedge their exposure in order to better manage their risk.
Psychological Stops and Hedging
By manually closing the trades the psychological pressure that the price might reverse in any moment intensifies. Certain traders will battle with themselves whether to close the trade or wait for the price to reverse but they forget the market does not halt and wait for them to conclude what actions they would like to take.
The most common outcome of this hesitation is the traders suspend their trading activity and wait for the market to smile in their favour. The negative effects are that the trader will dismiss any new entries in the market, dent his or her confidence and fee completely helpless. All this could have been avoided if a the risk could have been predetermined via a stop loss order.
The second solution is to hedge the trades. As lucrative as it may sound hedging is designed for proficient traders with the right characteristics. Hedging will often require holding the trades for a long period of time while incurring the rollover costs. It is fairly easy to get entangled with the hedged trades, which tends to end with the trader watching all the positions get closed due to insufficient margin.
In our trading strategies we refrain from direct hedging and to this date since May 2014 we have not exercised a single hedging strategy. There are countless techniques of placing stops in the market and is simply a matter of time until you find a technique that suits your trading style. You may browse through our trading strategies and note how we place our stops in the market.
Take Profit Orders
Take profit orders is also based on technical levels and not randomly placed. A trader cannot fancy a 15 pips take profit in a particular trade and then fancy +100 pips take profit because he or she want to earn hundred pips.
Even if we employ fundamental trading strategies we are still using technical analysis to determine the location of the take profit order. There were many times we have disregarded technical entries due to the fact the take profit was too small in comparison to the stop loss order.
The greatest difficult in managing open trades in the market deciding whether to remain in the trade until the predetermined take profit is reached or to end the trade ahead of time with a profit.
We have to make numerous choices in our trading strategies and although we were successful, in our EURUSD, EURGBP and Brent crude oil we have exited ahead of time and the market continued to trade in our predicted direction or triggered our take profit order despite the fact we had sufficient reasons for exiting those trades.
Our conclusion is that if there is no sufficient reason for closing the trade ahead of time it is essential to have confidence in your trading strategy and your decision on the location of the take profit order. In our opinion the most effective way of dealing with such dilemmas is to realize partials, closing 10% or 20% of the trade with a small profit,
The market exposure is being reduced after partials are being realized and a profit has been earned. When a sufficient distance has been gained from the market we shift the stop to the entry and even beyond in order to ‘lock’ profits.
Perfecting your trading strategy will come with time. If you are new to trading do note that there are likely to be losses as well as profits. There may be a period of time where you will be very successful and times when you will be unsuccessful. Managing your risk is important as excessive risks often lead to hefty losses. If you are currently over-leveraged with losses you are welcome to read our risk management guide: managing a drawdown that discusses such scenarios.
It takes years of trading experience to perfect your entries in the market. Traders tend to learn more from losses rather than profits. We are proving trade alerts for seasoned traders, we provide the trading strategy for each alert that issued, which also enhances the learning experience of forex trading.