If you were to spend time reading the opinions of forex traders about their strategies, one of the things you will notice is how almost all of them have applied stop loss strategies in their trade. Indeed, stop loss and take profit strategies are very common in the trade. One thing that you might not immediately notice, however, is the existence of different strategies when using a stop loss. Most traders assume that a stop loss is simply a tool that you put on the trading bars to help you exit the market when necessary. They do not, however, realize that there are tactics behind the placement of each stop loss. If you want to maximize your profits and minimize losses, you must learn about the different strategies applied to a stop loss. There are many strategies that exist in this regard. The following are the most common of these.
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1. The Steady Stop Loss Strategy
After you deploy the stop loss, you can choose to either adjust it before the trading phase ends. In this strategy, though, the goal is to leave the stop loss to run its course without adjusting it. This strategy is unique in the sense that it does not follow the changing status of the market. Instead, the trader hopes that by the end of the trading period, the stop loss will have triggered its set target. This strategy has various advantages which include:
- Helps the trader trade without any emotional influence
- Eliminates the possibility of adjusting the stop loss too early
- It is among the simplest strategies to implement
Even though it has advantages, the strategy also a couple of demerits. Some of the disadvantages include:
- It poses the highest level of risk
- It discourages traders from being ambitious
2. The Breakeven Strategy
This strategy is as simple as its name suggests. The goal of the trader is to leave zero chances of risk. The stop loss is therefore put as close to the entry point as possible. Traders who use this strategy usually hope that the market ends on a high without triggering the stop loss. This strategy has several advantages which include:
- Removes all risks available in the market
- The strategy does not require any real analysis
- It is a straightforward strategy that can be implemented by all
Even though this strategy has the above advantages, it is nevertheless a controversial strategy. Some of its main disadvantages include:
- It automatically lowers the odds of the trader
- It is a dull strategy that has no forex trading logic behind it
3. The 50% Stop Loss Strategy
Finally, the 50% loss strategy is one that seeks to risk only half the amount invested. Traders who use this strategy hope to exit the market when the level of losses they can bear is triggered. This strategy relies on the market data of a previous day or previous trading session. The trader uses the previous days’ price lows to determine where they will put their stop loss. This strategy has some advantages like:
- It eliminates risks by half or more
- It is logical and relies on the price action
- It gives the stop-loss enough time in the market
This strategy is definitely among the most pragmatic when using the stop loss. Despite that though, it comes with some demerits which include:
- It risks a half or more of your assets
- It makes traders edgy and doubtful
Which Strategy Should You Choose?
Depending on your experience in the market and your level of investment, any of the three options can be appropriate for trading. Most experienced traders tend to go with the two logical options of the three though. Beginner traders can, however, use the Breakeven strategy to raise their confidence and awareness of the market. As a new trader, you might also need to analyze the market from the perspective of an Admiral Markets broker in order to gain the right insights.
It is important to note that the above strategies are not entirely fail-safe. The forex market has its risks which tend to catch traders off-guard. You must thus ensure that you have done enough research and analysis of the market in addition to using the stop loss strategy. This is the only way to raise your odds in the forex market.