When trading currencies, there are many things to take into account in order on how fx works and how to be successful. One of the most important factors is using stop losses effectively. There are various ways to do this, and this article will explore 10 popular stop-loss strategies.
1) Fixed Stop Loss
A fixed stop loss is set at a predetermined amount below the current market price. For example, if you buy EUR/USD at 1.3000, you might set your stop loss at 1.2900. This means that if the market falls below 1.2900, your position will automatically close and you will lose the money you invested.
2) Trailing Stop Loss
A trailing stop loss moves with the market, allowing you to protect your investment as the market rises, as well as minimize your losses if it falls. A trailing stop loss will increase with the market price and decrease against it. For example, say you buy EUR/USD at 1.3000 and set a trailing stop loss of 5 pips below current market price. This means that if the EUR/USD goes up to 1.3050, your stop loss will follow by 10 pips (1.3060). If the pair then goes back down to 1.3000, your stop loss is now just 5 pips above that level – increasing your opportunity for gains if the pair continues to rise back up again (to about 1.3045) but decreasing your risk should its trend fail to continue upward or reverse.
3) Time Stop Loss
A time stop loss is set for a certain period of time. For example, you might set your stop loss at 1 hour or 4 hours to take advantage of short-term trends – this could help cut down on the number of trades necessary to achieve your goals. The downside to this type of stop loss is that you are opening yourself up to more risk due to not being able to control exactly when the market will close should it go against you. It also does nothing if the market continues rising further away from your level, which means it’s best suited for either trend trading or day trading.
4) Conditional Stop Loss
Conditional stop losses are stop losses that are only triggered if a certain condition is met. For example, you might want to set a stop loss if the market drops below a certain level, but not if it rallies back up again. This can be helpful in protecting your profits while still allowing your trade to stay open in cases where the market does move in your favor.
5) Minimum Stop Loss
A minimum stop loss is a stop loss that will always be set at a certain amount – no matter what the market does. This type of stop-loss is usually used with very risky trades, as it minimizes the potential losses that can be incurred if the trade goes wrong. However, it also limits the amount of profit you can make if the market moves in your favor.