Using Stop Loss Order and Trailing Stops in Currency Trading
When you learn about currency trading you will come across the stop loss order and the trailing stop. A lot of traders think that you should be using one or the other. It is possible to use both a trailing stop and a normal stop loss order. Of course, you should know what each of these orders do and how you can combine them effectively.
Currency Trading Stop Loss Orders
Stop loss orders are used in currency trading to limit the risks you face with a trade. The stop order will be set at a predetermined price and once the currency pair price reaches this point the order is closed. This is one of the best ways to protect your trading account from large losses when your trade turn against you. The normal stop loss order can be adjusted after the trade has been opened, but this is not recommended.
The Trailing Stop
The trailing stop is actually a type of stop loss order that works as a means of protecting you profits as well. When you place a trailing stop the order will shadow the currency pair’s price movement. When the price reaches new heights the trailing stop will automatically adjust. This means that once the trade is profitable the trailing stop is no longer a stop loss order and more a profit protection order.
Working With Both
When you place both a normal stop loss and a trailing stop you have to know where to set the levels. Before you actually set the orders you have to calculate how much you are willing to risk on the trade. It is recommended that you not risk more than 2% of your trading account on a single trade. While this is the recommended level there are many traders who will not risk more than 1% on a single trade.
Once you know how much you are willing to risk you can set your stop orders. The trailing stop should be set at a deeper rate than the normal stop order. If your risk level is 2% then the normal stop order should be set at 2%. However, the trailing stop should be set at 2.5% or more. Of course, you should not set the trailing stop too deep because this will negate all the benefits of the trailing stop.
Advantages of Using Both
You may wonder why you should take the time to set both of these orders. There are many benefits that come from this, but the most important is the removal of emotions from the trade. When you have a trailing stop you do not have to set a take profit order if you do not want to. This means that you will remove the feeling of greed when you come close to the take profit point. By having a trailing stop you ensure that you keep at least part of your profits.
The inclusion of a normal stop loss order limits the risks you face with the trade. Of course, when you are setting these orders you have to take the normal fluctuations of the currency pair into account.
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