As we approach the forex trading field, we often focus on two things: The trend study, to know which way to position our trades and to obtain trading signals with technical indicators to know when exactly to enter a position in the direction of the trend.
However, what very often beginners forget is that these elements are not enough to trade successfully, you must also learn to choose and manage Stop and Limit Orders to secure your wins and prevent losses.
Choosing Stops and Limits Based on Risk Management.
The first rule to define the Stops and Limits based on risk management. It is necessary that your stop is always tighter than your limit. For example, if you have a goal to gain 30 pips, it is imperative that if your stop is hit, the loss is less than 30 pips. In this way, in the event your stop or limit is reached, you will almost always remain financially a winner, even if you are right only half the time.
Traders should bear in mind that stop orders that are too tight can lead to a loss in closed positions, without having to be “wrong”, while a limit may be too ambitious and have missed a few pips.
However, contrary to what an investor might think, considering this principle is not enough to position his stops and limits correctly.
But also (and especially) one should take into account the important thresholds.
Trend directions change depending upon various factors, as currency pairs do not move in a straight line and “block” or return to what might be called generically “important thresholds”.
There are many techniques to identify these important thresholds:
-Supports and resistances
-The high points and low points
– The moving average
-The trend lines
-The pivot points
-The psychological thresholds
Before choosing goals (stops and limits), it is appropriate to review the important thresholds that are more or less close to the rate of the currency you want when placing your trades.
The ideal is to use all (or at least many) of these techniques to identify exhaustively all the thresholds that could be considered significant.
Of course, by doing so you will spot many potentially important thresholds and some others, which are less important and you will have to sort out.
Sorting means simply to try to keep important thresholds confirmed by at least two different techniques, such as a carrier or a resistance which is also a Fibonacci retracement.
The link between risk management and important thresholds
Once the important thresholds are identified and sorted, risk management actually occurs. You just need this stage to “choose” among your important threshold limits and stops, taking care to choose a more distant limit from the current price, than is the stop.
To conclude we need to stress the fact that one should also be careful not to choose too ambitious limits or too tight stop orders. To do this, it depends primarily on the time scale of your operation of forex trading. There are no rules, but it can be considered for the short-term trading (on graphics 1M or 5M), goals gains 15/25 pips are reasonable, while for trading on hourly charts, we can risk target earnings up 60 to 100 pips .