Setting Up Your Forex Trade For Success With Stops and Limits

When trading in a market that is as fast paced as Forex is, preventing substantial losses is just as important as coming out ahead. You need to have systems in place as a part of each plan that not only will maximize your gains, but will also minimize your losses if your trade does not go as you thought it would.

There are simple strategies you should employ in each trade to make that happen for you. Fixing buy and sell setups will help you to control your risk while increasing your profitability. They work by fixing when you will enter a trade, and when you will exit. Regardless of whether you are gaining or losing.

Why is This Important?

Buy and sell setups take the human element out of the trade. Before you invest your money, you choose the terms that expose you to the least amount risk as possible. Once the trade begins, for better or worse you sit back and let your money ride. Trading in this way helps you to control those decisions you would make based on your emotions, such as pulling out too soon when you have shown some gain, or staying in the trade too long in order to try and reverse a bad trade.

The successful traders I know make their buy and sell setups and then go about the rest of their day. Laptop is closed and they resist the urge to constantly check on the trade’s status. This is a good system to employ as it allows the investment to run its course without any interference from a sudden emotional decision.
The Stop-Loss Order

The stop-loss order demands that the trade be exited if it reaches a certain price. If your currencies reach that stop price the order will be executed and your losses minimized.
The trick is to develop a risk to reward ratio that allows your trade the time it needs to execute while not putting yourself at too much risk. A 1 to 2 ratio is usually the ideal set up for determining where to place your stop loss. For example, if your account will allow for a loss of up to 50 pips, place this as your stop-loss order below your entry level price. Your limit will then be placed at 100 pips above it.

For some traders, it is easier to analyze in terms of percentage. If they know that they can handle a 5% loss in their account, they will set up the stop-loss to reflect that. Study the chart carefully before implementing this method. With currencies that are showing frequent fluctuations your stop-loss should be low enough to where it won’t prematurely stop your trade in the event of a quick sudden dip and followed by a reversal.

The stop-loss acts as an insurance policy of sorts for all of your trades. By placing that order you are placing a level on the amount of money you are willing to lose. Remember this during those times when your trades head in that direction and stick to the order you had set in place. Just like an insurance policy on your car, you may not always need it, but when you do you are glad to have it.

Setting Limits

It may seem counter-productive to be setting a limit on the amount of money you gain from a trade, but learning how to set your limits and abiding by them will make you more profitable in the long term. The Forex market works just like gravity, what goes up is eventually going to fall back down. You want to set your limit so you are selling your currencies just before it begins that descent back down.

Like the stop-loss, setting limits helps you to avoid making choices based on your emotions. New traders get nervous as they watch there trade reach the reversal point and will stop it before maximizing their profits. While others may let greed get in the way and ignore indications that the currency is getting ready to move in the opposite direction.

Setting up your limit involves closely analyzing the trends and trying to predict when that reversal will take place. To minimize your risk, choose a point a few pips before you believe that will happen.

You could really uncomplicate the decision of where to place your limit by simply asking yourself how much of a gain would you like to see. Set your limit there, and let the trade run its course. So long as you don’t fixate on an unrealistic goal, that system should work in putting funds into your Forex account.

It is a challenge to figure out the final outcome of a trend. This involves careful review of multiple time frame charts and a market that is behaving with some predictability. For new traders it is a good idea to set limits based on what you want to earn, then use hindsight and your charts to analyze how that trend ran. This will help you find those indicators embedded in your multiple charts that help seasoned traders make profitable predictions.

Working Stop-Loss and Limits Together

Once you understand how and why to use stop-losses and limits, you can better manage your money by controlling your risk to reward ratio. As mentioned earlier, some traders will enter a trade at a 1 to 2 ratio, where there possible profit is double what they stand to lose. This is a good system for new traders that will increase your odds of retaining money if you practice it using multiple trades at the same time.

Using specific buy and sell set ups for every trade will help prevent the new trader from falling victim to those bad habits that many develop in the first few months of Forex trading. When you discipline yourself to set up your trades from start to finish and then let the decisions run their course, you will see more profitability over the long term.

Casey Stubbs is the founder of WinnersEdgeTrading.com which is one of the most widely read forex sites on the web. Winners Edge Trading has trained thousands of people to trade the Forex markets.