The Zen and Art of Setting Stops
My dear friend EUR/GBP, which has always been a strong pair for me hit my stop last night while I was sleeping. If there is one lesson I have learned with Forex it is this: "Set tight stops, and NEVER change them." I cannot emphasize how important this is.
When I started Forex trading I used to set a stop, then in fear it would be hit while there was still potential, I would raise the stop. This would almost always lead to me losing at least 2x what I had initially intended to lose.
You have to remind yourself that you will lose money. It's just important that you are making more money than you lose.
Now some call the Forex market volatile and risky. Nothing could be further from the truth. An amateur investor that throws money into the Forex market without proper research and without setting realistic stops and limits is headed for disaster.
I think of Forex a bit more like fishing. Toss your line in the water, but after a little time has passed, if you aren't getting any bites, try changing spots. It takes finding just one section of a lake where the fish are to catch many fish. Why spend your whole day fishing in one place just because someone told you there were fish there?
If you ever have the chance to see any Forex competitions you will see that those making 300%-400% profit are losing money just as much as they are making it...but they are losing less than they are making.
This is the discipline of setting a stop and limit intelligently, and in many ways it can be a dark art. I usually agree to set my limit at 4x my stop. Thus, when I lose on a trade, I don't undo the profit I have made from a successful trade. It's simple math but amazing how few investors ever follow this discipline.
So last night I lost money on a EUR/GBP trade. It was a beautiful trade - strong short with an RSI creeping down from 70 on the 60, 30, and 15-min chart. When I woke-up this morning and looked at the charts, I jumped for joy - the pair had dropped like a rock! Then I checked my account, I had lost money on the trade, but how? With a tight stop the pair hopped-up for just a moment and hit my stop then immediately dropped from that point on. This is the nature of Forex and an event you will have to be comfortable with.
Yes, if I would have set a stop just a bit higher I would have made a lot of money. Instead a lost a little bit of money. However who knows, in a future trade the opposite might have happened. I could have woke-up and saw the pair climb higher and higher. In that case, the higher stop would have caused me to lose more money. This is why you need to set your stop and never change it.
Just remember, you only have to be right one out of every three trades and you are making money. If you are right 50% of the time with your trades you can make a fortune. This is the allure of Forex and why with careful trades you too can make money in the world biggest market.
When I started Forex trading I used to set a stop, then in fear it would be hit while there was still potential, I would raise the stop. This would almost always lead to me losing at least 2x what I had initially intended to lose.
You have to remind yourself that you will lose money. It's just important that you are making more money than you lose.
Now some call the Forex market volatile and risky. Nothing could be further from the truth. An amateur investor that throws money into the Forex market without proper research and without setting realistic stops and limits is headed for disaster.
I think of Forex a bit more like fishing. Toss your line in the water, but after a little time has passed, if you aren't getting any bites, try changing spots. It takes finding just one section of a lake where the fish are to catch many fish. Why spend your whole day fishing in one place just because someone told you there were fish there?
If you ever have the chance to see any Forex competitions you will see that those making 300%-400% profit are losing money just as much as they are making it...but they are losing less than they are making.
This is the discipline of setting a stop and limit intelligently, and in many ways it can be a dark art. I usually agree to set my limit at 4x my stop. Thus, when I lose on a trade, I don't undo the profit I have made from a successful trade. It's simple math but amazing how few investors ever follow this discipline.
So last night I lost money on a EUR/GBP trade. It was a beautiful trade - strong short with an RSI creeping down from 70 on the 60, 30, and 15-min chart. When I woke-up this morning and looked at the charts, I jumped for joy - the pair had dropped like a rock! Then I checked my account, I had lost money on the trade, but how? With a tight stop the pair hopped-up for just a moment and hit my stop then immediately dropped from that point on. This is the nature of Forex and an event you will have to be comfortable with.
Yes, if I would have set a stop just a bit higher I would have made a lot of money. Instead a lost a little bit of money. However who knows, in a future trade the opposite might have happened. I could have woke-up and saw the pair climb higher and higher. In that case, the higher stop would have caused me to lose more money. This is why you need to set your stop and never change it.
Just remember, you only have to be right one out of every three trades and you are making money. If you are right 50% of the time with your trades you can make a fortune. This is the allure of Forex and why with careful trades you too can make money in the world biggest market.
posted by Morgan at
4:04 PM
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