For many where this is not an option, the question arises how to trade when one is not able to sit in front of the charts during the day.
If available time to view and analyse forex charts is limited, the trader will need to set up an order which will either trigger to open or trigger to close automatically. These types of orders on many platforms are known as “working orders”. These are further split into two groups:
- Stop Orders (the subject of this article) and
- Limit Orders
This article will limit itself to Stop Orders. The stop order is triggered when the movement of the drops below for a Sell (short) trade or rises above a Buy (long) trade. The unit of measure in the vast majority of cases is the number of pips (points, ticks) that a trade has moved and not the monetary value of the trade. This is one of the most important skills for a trader to learn, watch the pips and not the value. That is important because if during the early days of a home forex business the trader gets used to quantifying success by pip movement, then there is nothing new to learn when trading with much higher pip values (i.e. the amount per pip).
So how does it work in practise? Let us assume that a trader opens a Buy trade on the GBP USD at 1.6110 on the expectation that the pound will improve relatively to the US dollar. However, as a safety net, he sets the order up as Stop Order. He sets the trade to trigger a Sell if the trade reaches a position 25 pips away from the opening value (this would be 1.6095 in our example). This level is known as a stop-loss, the level at which the order is closed (stopped) and the trader realises a loss.
Whilst the trade is live and moving in the direction of the predicted movement or even retraces (but less than the 25 pips) the trade remains live. However, if the value of the trade moves 25 pips against the trader, this automatically evokes the Sell instruction and the trade is closed with a loss.
This is of course not an ideal scenario, but the objective is to limit loses. The example provided in this article provides a 25 pip stop. The reader needs to be aware that the longer the time frame, the greater the size of the stop-loss. This is essential as each trade needs to have “room to breathe” or in other words to fluctuate as traders buy and sell the currencies. The size of the stop-loss should vary dependant on the length of the proposed trade, the longer the time frame the greater the stop-loss.
The practical implementation of the use of stop orders is one of the key skills that the author has acquired whilst watching live traders up to six hours a day, an integral and essential part of the training required for successful forex trading.
Kaz Kowalski has been highly successful as a project management consultant working on a number of high profile projects in blue chip companies across a variety of industries including Banking, Information Technology and Telecommunications. He has utilised his analytical ability to review and determine the profitability and effectiveness of different home business opportunities in building viable and profitable business models. As a result of his analysis, he has concluded that a Home Forex Business has significant advantages over the majority of other home business opportunities.