How to Trade Forex- Where Should I Place my Stop-Loss points?

Learning how to trade forex is easy...implementing trading strategies is a completely different story.....One of the biggest learning experiences for me was the proper places to put what is called Stop/Loss for my forex trades. For those of you that are green, a stop/loss is simply a point where you are willing to surrender your trade to try to control the bleeding. As you can probably imagine, this is important and should be implemented anytime that you go into a trade, regardless of whether you are learning how to scalp forex, or are simply do longer, more stable forex trades. Bottom line is if you want to learn how to trade forex AND make it profitable, you need to understand this important concept.

If you are new to forex, you probably look at stop/loss points in the simplest fashion....your strategy may be to control the losses by deeming a point in the trade where you are willing to surrender. However, if you are doing this, you are one of the many that will likely be on the losing end of almost all forex trades.

How to locate a proper stop/loss point for a trade

First of all, I am going to say that you have a ton of things going against you. There are some that believe that some "bigger" traders such as banks use a tactic called "stop-loss hunting" to force us "small fish" out of the market. I will get that later but for now let's take a look at how most experienced traders locate proper stop-loss points in their trades.

1. Locate your support and resistance points-This is important because as you know, the market will generally stay inbetween a certain frame UNTIL it breaks them. Now I am being kind of vague because finding support and resistance points aren't so cut and dry, especially if you are day trading (something I don't recommend). As a general rule, I typically put a stop/loss nearly 20 pips below this line but understand that I don't day trade. There is a reason I do this...

Most of the time (but not all the time), once a resistance line is broken, it is followed by a retracement period in which the traders are testing the line itself. I have already spoken briefly about trader's remorse but if you don't know what I am talking about, then you should take a look at this theory.

Once again, I don't day trade and most beginning forex traders do (and do so with great risk) so this may or may not apply to you.

Oh, and for you day traders...the resistance and support lines are very hard to define in these shorter time frames because the movement is a lot more volatile. If you are a beginner, you should focus on the longer time frames, as you will be able to identify trends more easily.

2. Understand what the general trend is for the currency pair- First of all, if you are trading using one or two time frames, chances are you won't be in the game long. Even if you are day trading with 5 minute or 1 hour charts, I implore you....take a look at the daily, weekly, monthly and quarterly charts. You should know the general direction that the currency pair is going. For instance, as I am writing this rant, the USD is falling to the euro and has been for months. However, if you were simply using the shorter time frames and ignoring the primary trend, you may think that the USD is rebounding.

3. If you are a forex day trader, the quickest (and easiest) way to make a little profit is to short your trades- What I have learned is once you have defined the market's R & S points, if a pair breaks one of these barriers, chances are you can expect a retracement of some sort rather than a steady climb upward. Grab some quick profits by trading the Resistance and Support lines. I don't do this because I am a set it and forget it kind of guy (I like to profit over the course of a week or month rather than daily) however, it is one of those weird things I have noticed.

4. If the support or resistance line is too long (60+ pips) and you can't afford to play the line, lower the leverage until you can play- No surprise here, right? I know you want to make a ton of money trading but you have to understand that ultimately, you want to stay in the forex game, right? Understand that in most cases, currency pairs that do make money are extremely volatile meaning that they will shift down or up on a dime. While recognizing and identifying the S & R lines isn't totally fail-safe, it is a relatively safe bet to bet on. Reduce your leverage and take less profit until you are in a position to play with higher leverage.

Now, while a stop/loss will protect you and your forex account from suffering losses that would make it hard to rebound from, you also are going to want to place an exit point where you can exit the trade ( I will talk about this at a later date).

Now for the realities of forex trading and this will most likely get your goat, so to speak. So, let's say that you have done all those things I have spoken about...you have:

• Identified the trend
• Identified the support and resistance levels.
• Have an entry point strategy.

The hardest part to realize is that even if you do all these things, you can still lose quickly if your stop-loss point is not in the right spot. Why? Because of stop-loss hunters.

What are stop-loss hunters?

Stop-loss hunters are simply bigger entities (such as banks and other institutions) that trade forex as well. You have to start looking at trading in the same way that a gambler would look at sports gambling. Your competition are other traders, just like in gambling, you competition will be other gamblers. There are only two sides that you can take...the winning side or the losing side. Movement of the forex market is determined by volume.

These stop-loss hunters simply determine a point where they think the majority of traders have put their stop loss point and trade enough volume to move the market down (or up) to that point. That is a good strategy for them (and most of the time, the forex brokerage firms that manage the losing trades) as they basically reap the losses of their competition. And perhaps the most frustrating part of this is that the trader that just lost because his point was hit, gets to watch the market climb back up in the direction he thought it was going to go.

And it is for that reason, that I will place my stop loss point at a much lower point than simply hovering around a support or resistance line. I want to be assured that if I think that the market is moving in a certain direction, that my trade won't get "stopped" out prematurely.

Oh well, I am done with this rant. If you want to learn to trade forex, you need to not only know the rules but understand some of the nuances of the market and some of the dirty tactics that your competition will employ to know you out of the game. Thanks for stopping by forex trading for beginners.