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Why Stops Are a Key to Your Trading
Stops are a key to trading, both a recognition that the forex market lives to run stops and where you place your stop. The focus of this article is on the latter.
A stop should be like an insurance policy, which is to limit your risk if a trade does not work out as expected. It is not to be used to just limit your loss as that insures you will likely lose money over time, even at times when you have the right idea.
I have seen traders pick a level to buy or sell with a wide stop (e.g, 50 pips) only to see the market run against them to almost touch the stop before moving away from it. The tendency then is to close out the trade as soon as it gets to around breakeven or a tiny profit. So in the end there was a 50 pip risk with little reward. I am sure we have all been in that situation, myself included, giving a sigh of relief when the trade got back to breakeven.
I have also seen traders place stops simply based on a desire not to lose more than x pips, This often sees trades getting stopped out based mainly on how much one is willing to lose.
So the question is what is the ideal place for a stop? You need to start with the premise that you have the right trade idea and odds are in your favor. You then need to find a stop that you can use as an insurance policy, which means it only gets triggered when it would indicate the trade is not working out.
I propose turning upside down the way many traders put on trades . IdentifY your stop/risk first and then base your entry off of your stop rather than putting on a trade and then selecting a stop. Your stop is then an insurance policy.
In this regard, I have created a short video to show how you can place trades this way, which in my opinion, assuming it is the right trade idea, raises the odds the stop will not get triggered as your trade is given time to work out.
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