How to Use Stop Loss in Forex Trading

Stop Loss is a fundamental tool for any trader, the most concrete expression of the discipline known as Risk Management. Stop Loss is the price at which the trade automatically closes. It is essentially a conservation tool that comes to the rescue when the market is not reacting as desired. In a nutshell, it serves to reduce losses. How is the Stop Loss identified? In short, how is the price level that must play this important role determined? There are two methods, which can be used alternatively. The Stop Loss can be derived from one's economic needs. In this case, the "Money Management path" is followed. If the purpose of the Stop Loss is to avoid unsustainable losses, then it is possible to establish the maximum tolerable loss (which varies from trader to trader) and translate it into pips. At this point, the pips are added or subtracted from the current price to find the price level that should act as a stop. The Stop Loss can be derived using a second method which, to tell the truth, is more widespread. This method proceeds from a simple truth: a trade must be closed not only when it has produced unsustainable losses but also when, being at a loss, it is unlikely to recover in a short time. In short, in this case, the Stop Loss must correspond to the price level reached at which it is difficult for the market to reverse course quickly. The reference is to supports and resistances. The Stop Loss must coincide with the support when the position is long, i.e., in purchase; it must coincide with the resistance when the position is short, i.e., in sale. It only remains to discover how supports and resistances are identified. There are numerous techniques, some of which are complicated. The method that best combines speed and reliability is that of minimums and maximums. Very simply, a first support coincides with the session lows, while a second support coincides with the weekly lows. Similarly, a first resistance coincides with the session highs, while a second resistance coincides with the weekly highs. In this way, it is sufficient to take a look at the chart to understand where to place your Stop Loss and trade with the maximum possible serenity.