After you’ve done your research and developed an excellent trading plan that includes a stop-out level, you must now ensure that you execute those stops if the market moves against you.
There are two approaches to this. One method is to use an automatic halt, while the other is to use a mental stop.
Which one is right for you?
The answer to this issue is found in your level of discipline, which is where the difficulty lies.
Do you have the mental fortitude and self-control to keep your stops?
In the heat of battle, what typically distinguishes long-term winners from losers is their ability to implement their set objectives objectively.
When the agony of losing kicks in and brings in negative thoughts like, “Maybe the market will turn right here,” traders, especially the more inexperienced ones, sometimes question themselves and lose that objectivity. I should hold out a little longer and it will go my way.”
WRONG!
If the market has hit your stop, your purpose for the transaction has expired, and it is time to exit… There are no questions!
This is why the all-powerful forex gods devised limit orders.
Limit orders should always be used by new forex traders to automatically shut out a lost deal at predefined levels.
You won’t allow yourself the opportunity to doubt your idea and make a mistake this way. To execute the order, you won’t even need to be seated in front of your trading station.
What a fantastic idea!
Of course, the more transactions and experience you have under your belt, the better your grasp of market behavior, your strategies, and your discipline will be.
Manually closing transactions exposes you to errors (particularly during unforeseen events) such as entering the erroneous price levels or position size, a power outage, a coffee binge-induced toilet marathon, and so on.
Don’t expose your trade to additional danger by not having a limit order in place!
Because stops are never fixed in stone and can be moved, we will conclude this session with three rules to follow while utilizing stop loss orders.
3 Rules of Setting Stop Losses
Rule #1: Don’t let emotions be the reason you move your stop.
Like your initial stop loss, your stop adjustments should be predetermined before you put your trade on. Don’t let panic get in the way!
Rule #2: Do trail your stop.
Trailing your stop means moving it in the direction of a winning trade. This locks in profits and manages your risk if you add more units to your open position.
Rule #3: Don’t widen your stop.
Increasing your stop only increases your risk and the amount you will lose. If the market hits your planned stop then your trade is done. Take the hit and move on to the next opportunity.
Widening your stop is basically like not having a stop at all and it doesn’t make any sense so to do it! Never widen your stop!
These rules are pretty easy to understand and should be followed religiously especially rule number 3!
Do Not Widen Your Stop!
