Anytime that you are investing in the Forex market, you are going into the Market blind. You don't know what point of the investing trend you are entering in at. You might be investing in a Forex stock just before the trend changes. Smart investing means you need to protect your trading float and set up a stop loss. This needs to be done before you enter a trade, so that there is no room for error, or last minute indecision. A stop loss is simply a predefined point at which you exit the stock.
Effectively, it's like drawing a line in the sand underneath the share price, saying, "If the share price falls below this line, then the stock hasn't done what I thought it was going to do, and I'll exit the position."
This allows you to protect your investing trading plan, because it cuts your losses short, and guards against an all too human tendency to want to believe you must be right.
95% of investing in an entry Forex position means you are expecting to profit from the trade. If, however, the share-investing price goes against you, you might feel the need to justify why you bought the stock by holding onto it until it turns a profit. You might have heard the idea that all big investing losses once started as small losses. Well, while the share price continues to go in the wrong direction, those losses grow in lockstep. This is why you need to have a stop loss in place - it's like having an ejector seat that tells you when to abort the mission.
One of the most common question I'm asked when traders are introduced to a stop loss is "How wide should I set my stop?"
In other words, how much room should I give the stock to move? There are no definitive answers to this question because it depends on what time frame you're investing in. If you're a shorter-term investing trader, you're going to have a stop loss that's set closer to the share price. If you're a longer-term investing trader, you'll give the share price a little bit more room to move and set your stop loss lower.
Once you've identified what time frame you're looking at trading, you need to be able to remove the normal market noise (volatility) in that particular time frame. You don't want to have to close out of an investing position just because a share price moved a little bit due to its normal trading volatility.
In fact, there are some serious drawbacks to setting tight stops.
First, you'll decrease the reliability of your system because you get stopped out more often.
Second, and probably a little bit more importantly, you dramatically increase your transaction costs, because you're trading transaction costs make up a major proportion of your business expenses.
To give yourself a fighting chance, you want to trade a system that doesn't chew through excessive brokerage fees. This is one of the major reasons I steer my clients into developing a trading system that runs over a slightly longer time frame. With the correct system in place, and your investing risk minimized, you are well positioned to maximize your trading profits.
-=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=- David Jenyns is recognized as the leading expert when it comes to designing profitable stock trading systems.
Discover the "secret formula" of trading that anyone can use to consistently generate BIG profits from the market by downloading your FREE copy of David's new Ultimate Stock Trading Systems course.
Is Your Soulmate an Idiot? Lately, I think people are investing too much energy in the idea that they "must find their soulmate." Where do we get this idea that we are somehow not complet...
Negative Calorie Effect in Foods Whatever food we eat, our body has to work hard to digest it and absorb. Some foods need more energy than the others in the process of digestion. It is likely t...
The Tidal Wave Sale A tidal wave sale happens when you overwhelm your customer during the sales process. In other words, you bowl them over with too much information...
Nine Reasons Why Mentoring Matters to You In this article I'm going to show you why, despite the competition for our time and energy, being a mentor is one of the best things you can do.
Focus = Clarity Super Star atheletes win at their games because of focus. You can win at the game of life when you have the same intensity of focus on your goals.
Hypnosis in Childbirth - Alternative to the Epidural? What is hypnosis and how can it be beneficial for moms in labor? Find out how it can make any mother-to-be have an easier, shorter and less complicated deliver...
Avoid The Traps Of Finance Financing and refinancing real estate can be extremely complicated and tricky. Few people have a real understanding of everything they sign and pay for in a tra...
The Benefits of Memory Foam Dog Beds Memory foam dog beds are crafted using the same technology as that used for memory foam mattresses, mattress pads, and pillows. Their "open-celled" composition ...
Three Important Litter Box Considerations There are three important litter box considerations to account for whether you're a new kitten owner, or someone who has had a cat for a while. If kitty isn't...
7 Ways To Get More Repeat Traffic To Your Site 1. Make all or part of your site into a valuable directory. Set up different sections of your site for people to submit their ezines, articles, ebooks or affil...
Starting a Shade Garden... Discover tips on - No matter how much shade is in your landscape, the right flowers, plants, bushes and bulbs will grow in this area when given a chance.
Debt Consolidation We have all had that sinking feeling when the bills hit the door mat. Its the day after the night before what have I done feeling! Debt Consolidation could be y...
Writer School? Here's something from my mailbag. "Dear Michael, do you need to
do good in school if you want to be a writer? I stink at school
and all my friends laugh at me w...
The 7 Biggest Baby Sleep Mistakes That Parents Make The single biggest challenge that most new parents face is trying to figure out how to get their child to sleep through the night. Surprisingly, most are going ...
Print this page