Looking for best methods to avoid premature stop-loss triggers? We got your back here! You can choose from any of these strategies to protect your trade!
AtoZForex - Newbies in Forex usually avoid placing a stop-loss order due to the fact that it can be challenging to hit a balance between two conflicting criteria. These include avoidance of unnecessary triggers and preventing larger losses.
5 best methods to avoid premature stop-loss triggers
In case stop-loss price is too close, then there is a possibility for too frequent losses with exits even from good entries. However, in case a stop-loss order is far away from the entry point, we can expect rare but larger losses. Is there an ideal stop-loss order?
The ideal stop-loss order is the one that will not cause a premature exit due to the spikes. Moreover, such order will provide an early exit in case of a trend reversal.
Today, we talk about the best ways to avoid premature stop-loss triggers in Forex.
1. Percentage based stop method
This approach is the most fundamental when it comes to the placement of a stop-loss order. Moreover, it is very popular among newcomers. The stop-loss prices are based on the maximum percentage of risk that trader is seeing as acceptable. Thus, a stop-loss stands at the longest distance possible, taking the percentage risk and the trade size into consideration.
For instance, in case the percentage risk is 1%, and the account size is $5,000 then a trader closes the position before he/she reaches a loss of $100. As a result, odds of a premature stop-loss trigger is close to zero.
2. Bollinger Band stop method
This technique stems from the volatility of a certain asset. As a fact, volatility is mirroring the potential prices movement of a security in a given period of time. Therefore, by holding the stop-loss order in line with a volatility of a security, we cab avoid premature stop-loss triggers.
To execute such strategy, a Bollinger Band indicator is utilized. We use it to visually measure the volatility. Moreover, the stop-loss order then is placed below (long) or above (short) the Bollinger band. This will help you to prevent premature exit from the trade.
3. Trend line stop method
Moving on, the process of trend line stop is including the major support/resistance levels for a security’s price. When a long position is placed, the stop-loss order is set below the major support. In the same pattern, for a short position, a stop-loss order is placed above the major resistance level.
This strategy is built on the idea that if price closes above the resistance or below a support level, then the forecast is no longer relevant. Specifically, it is vital to have some cushion between the actual stop-loss level and the support/resistance level.
4. Moving average method
The price chart is including a higher period moving average. Now, we need to place the stop-loss order above the moving average for a short position. For a long position, we place the stop loss below the moving average. It is important to place the stop-loss order a bit away from the moving average. This strategy is assuring that a trade is withdrawn only when there is a strong trend reversal.
Even though it is a popular technique, it has its weakness. A shorter period moving averages are very often breached by the price action. The longer period moving averages are resulting in the stop-loss distance that is too big.
5. Fibonacci stops method
The Fibonacci levels are a big concept in Forex when it comes to deciding on the market critical points. The 61.8% Fibonacci level is a very popular retracement level. It provides a trader with an opportunity to assess whether an asset is currently bearish or bullish. As per this strategy, we place the stop loss order below 61.8% level. The technique provides a possibility to avoid a premature exit from a trade since when there is a strong reversal, the stop-loss will be touched.
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