Quite often, many traders are too much concerned with strategies and methods for entering market forgetting to select a correct tactics for leaving trading positions. Beginning traders can leave positions having just seen a minor profit in the terminal. What matters is to enter correctly, and then to rely to market in the part of profit fixation. But unfortunately the market is arranged so that you cannot to enter the market correctly at propper moment all the time. When price moves against your position, every trader must be armed with tactics protecting deposit from dramatic losses. One of such methods is Money Management Stop (usual stop).
Money Management Stop sets criterion for termination of trading and closing, when rate moves to the opposite direction. This method allows either protecting capital from losses and safe current profitable positions.
There are three criterion of usual stop:
1. Money equivalent –
when trader defines a certain amount in currency, which can be lost in case of risk, if the rate will move to the opposite direction. It is calculated in a very simple way. From the initial price (very often it is Open or the price, after which market moves to the opposite direction) one needs to count a number of points equal to risk amount.
Example: My deposit is 1000 $. I decided that can afford myself to lose 25 $ from one position. Trading is conducted by lot 0.05 with 1:100 leverage (1 pips = 50 cents). This way it is very easy to calculate that Stop must be put for 50 pips above the initial price.
2. Per cent equivalent –
is a very easy and popular method of placing Stop, when trader decides that he is ready to risk in one trade (all trades) with a certain percentage from deposit (profit).
Example: My deposit is 1000 $. I decided that can afford myself to lose 2% from one position and 8% from all positions. It will be expressed in money terms as 20$ and 80$ respectively. From psychological point of view, it will be much easier to realize losses in terms of 2% than suffering from fear because of absence of such a criteria.
3. Graphic criteria –
when trader decides that price on chart cannot reach a certain level. That can be support/resistance levels, Fractals, tops and bottoms of Swings, circle levels etc.
After consideration of all criterion, one can make a certain conclusion. Calculation of Stop level in money and percentage expression is very beneficial, because theoretically you won't lose more that you want to lose. In practice, there is a probability that your broker company won't just fulfill your order on time. Disadvantages of the first and second criterion are that Stops can be hurt by a high volatility. Graphical approach can decrease the probability of actuation of false Stops, but in case such Stop works losses can increase. Everything depends on trader and methods applied.
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