Good day forex trading koalas.
Welcome to another article in the Forex Mistakes Series.
Do remember always that these mistakes can cost you your currency trading margin accounts and hence we must strive to avoid these forex mistakes.
Today we are exploring how the useful Stop Loss can turn against us.
Let us imagine the stop loss feature as a safety air bag in a car. If properly installed, it will be activated at the most crucial time and potentially save a life. Now what if it is too sensitive? A harder than usual bump may activate the feature causing unnecessary problems.
When your stop loss is tight, this may be happening to you.
We all know that currency moments are not smooth. They consolidate a little, range a little and then perhaps continue on their way. If your stop loss is too tight, a mere spike against your direction of intended trade may activate the stop loss and render your trading position closed.
In the example above, Tom studied the market and believed that the currency pair would continue to be bullish. He bought a position at 1.3330 and set his stop loss at 1.3300. He knew that whole numbers are usually supports. The currency pair did indeed test the region of 1.3300 and activated his stop loss. His position was closed and Tom was happy that he was careful. However to his dismay, moments later the currency pair started to turn bullish and resumed the bullish trend!
What went wrong?
In this example, Tom did have a valid rational for placing his stop loss. Whole numbers are indeed often supports. However he should have remembered that TheGeekKnows has an article that mentioned support and resistance lines are never a single pip!
In the example above, Tom gave an allowance of 20 pips for his stop loss and that helped prevented a winning trade from being closed prematurely at a loss.
The stop loss feature is definitely a must when it comes to proper forex trading. However one must always remember to give an appropriate amount. For example extending slightly beyond a known support or resistance line. Failure to do so may result in your trades choking to a loss.
Related Forex Articles from the Koala Forex Training College.
- Proper money management is important
- Planning your trades well is crucial
- Support and Resistance lines are never a single pip