Moving Your Stop in a Forex Trade
I had an email from a client today regarding the movement of a stop loss. First of all, I'm going to start off by assuming that you do, indeed, use a stop when you're trading the forex, especially when short term trading. If you are trading without the use of a stop, you can plan on something very bad happening to your trading account at some point. It's just a matter of time. It's not a question of "if" it will happen, it's "when". I have seen absolute horror stories in my many years as both a trader and a futures broker. What really bugs the heck out of me is that a stop is something that is completely controllable by the trader! It means that we can control the size of our loss! I hope you truly appreciate what this means.
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Back to the question: how and/or when, do we move our stop once a trade starts to move in our favor? Well there is no exact, black and white answer. However I'm going to give you some very good tips and effective ways of limiting risk. First of all, I'm going to make the assumption that we're talking about day trading, however what I'm about to tell you can be used on any time frame. Let's assume that we've take a long position and we'll further assume that price starts to go up. Where would you think that price will stop? The answer is very simple - at expected, or at least potential, resistance. Doesn't that just make sense? So if price hits potential resistance, shouldn't we start reducing or eliminating risk? Of course!
So what can we use to help us identify resistance? Well, there are several tools available. First and foremost, the most important resistance is given by past price action itself. Nothing is more important than price. If price is rallying up and hits an old high, expect resistance. Therefore move your stop up to either mitigate risk or even put it at break even.
Another place to expect price resistance would be at prior swing lows in price. In other words, if we start off from a low point on a chart, and price rallies up, watch for previous old support levels to become resistance. These levels are very often price reaction points. When they're hit, it's time to get the risk out of the trade or at least move the stop up.
Other places you can look for resistance would be pivot points. Pivots are mathematically derived support and resistance levels that can be pre-determined a day ahead of time, using the prior day's data (in the case of daily pivots). If price rallies up to a pivot from below, watch for that pivot to cause resistance. Therefore, again, take the risk out of the trade or at least move your stop up to get some of the risk out.
Other points of resistance could be Fibonacci levels as price rallies up. These can be easily drawn on charts (most software has a Fibonacci drawing tool) and you can use Fibonacci levels as support and resistance levels too.
So these are some general guidelines. Of course there can be other factors that could also cause you to remove risk or at least greatly mitigate it, such as a pending news release, or a need to be away from your computer, etc.
Obviously there's a lot more to be explained that would best be shown on charts, but I hope you found these tips useful.
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