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Why you should not move your stop loss
Written by: PaxForex analytics dept - Tuesday, 25 August 2015 0 comments
There are many forex traders who don't know what to do to protect themselves in the forex markets. Online brokers offer various types of orders designed to protect investors from significant losses. The most commonly used order is a stop loss, but another type of order should be considered is trailing stop loss. One of the most commonly used methods for limiting the amount of loss is to place a stop loss order with your broker.
By using stop loss order, the trader will fix the value based on the maximum loss he or she is willing to absorb. Should the last price drop below this value, the stop loss turns into a market order and will be triggered. Once the price falls below the stop level, the position will be closed at the current market price, which prevents any further losses.
A trailing stop and a regular stop loss appear similar as they equally provide protection of your capital. The trailing stop offers a clear advantage in that it is more flexible than a fixed stop loss. It is an attractive alternative because it allows the trader to continue protecting his capital if the price drops. But as soon as the price increases the trailing
feature kicks in allowing for an eventual protection of profit while still reducing the risk to capital.
Once you have a trading plan that uses a proper risk/reward ratio, the next challenge is to stick to the plan. It is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with stop loss and limit orders from the beginning. This will allow you to use the proper risk/reward ratio from the outset and to stick to it. You should move the stop loss only when the trade is moving in your favor so you can protect your profits.
So, you took a position in the wrong direction and you see the market approaching your stop loss, and you keep a safer distance from it. And then you do it again and again. This usually results in a safe loss of money. More money than you planned to risk on the trade. You may do it because you have new knowledge or a feeling that you now know where the right place to put your stop is. However, that would be a bad idea because; your new placement is not going to be any better than your original plan.