Why is a Tighter Stop-loss Considered Wrong ?

Why is a tighter stop-loss considered wrong?

People have many ways to minimize their loss. One of the popular technique in Forex used by both professionals and novice traders is the stop-loss. This is a strategy where your trades are automatically closed if they reach to your set levels of price. This stop-loss orders do exactly what their name says. They save your money from being gone into the Forex industry. It is not possible for the people to monitor their trades all the time. It creates confusion and you also need to plan for the next trades after placing this trade. One way to close the trades automatically is by setting a stop-loss at your expected price level. When the price comes down and hit this level, your trade will be closed. Many people set this system to tight and lost their money even in natural volatilities. This article will tell you why you should not set your stop-loss too tight.

Give your trade some space

The new traders never want to give space to their trade. Most of them use a tight stop loss to limit their risk exposure. But if you do so the market noise will always trigger your stop loss. You need to give some space to your trade. If you stop loss price is too obvious chances are very high it will be hunted by the big investors. The experienced professionals in the Australian trading community always suggest using a wide stop loss. But when you use the wide stop loss make sure you reduce the lot size. Never trade with big risk as it will cause heavy loss.

Use the price action signal

So what is the ideal place to place stop orders? To be honest no can tell this in the CFDs market. However, if you can understand the Japanese candlestick pattern you can easily use a tight stop loss. But in such case, you have to do the multiple time frame analysis. Multiple time frame analysis is one of the best ways to identify the false trading signals. This dramatically reduces the risk of getting stopped by the wild swings of the markets.

It closes your trades even in natural volatile trends

The nature of this industry is it is volatile. One moment you are trading with currency pairs in a smoother price trend and the next moment it is sky-high. This is very natural as the trends are always changing. You have to keep in mind this changing of volatility and set your stop-loss accordingly. If you set the stop-loss too tight, you know what will happen to your account. Before you can go and have a walk to see your chart, the trade will be closed. This is the first mistake traders make when setting their stop-loss. They forget the nature of volatility and set it too close. The result is they lost money and the trades get closed.

The price change has some pattern in the Forex industry

Every market is different in Forex and they have their own time sessions. If you enter the market at a wrong time session, you will find it either choppy or not be moving at all. This is natural and you should design the stop-loss for every market. All the price changes in this industries and they can go up and down.  Try to understand the pattern of price change and set the volatility far away from this limit. If you set it too close, even a small change in price can make it close. Learn from the professional how they set their stop-loss.

Set stop-loss according to your account size

If you have a small account in Forex, you should plan your trading strategy to set the stop-loss at an effective level. Never set it too tight as it will not give any chance for market volatility. It should be designed based on your account and expectation of the price changes.