A ‘Stop Loss’ is a very important factor a Forex trader should always consider during technical analysis. Stop Losses were majorly designed to be used to minimize risk from the dynamical market, this way an account is protected from direct liquidation. However some traders don’t place paramount attention to this feature of trading because they believe most times the markets hunts their stop losses before heading its way to their speculated direction.
Yes i wont deny the fact that sometimes this happens to me as well in trading but there’s nothing anyone can do about it. Its part of trading and we all have to accept it in good fate, we have no choice to adapt to it. Imagine what happened to lots of trader’s accounts around the world on Black Thursday (Jan 15 2015), as they didn’t make use of stop losses. Even brokers had their own share in the demise of the CHF currency.
I believe this would serve as a serious lesson to a lot of traders around the globe. However lets get back to the main issue, what if we can minimize our stop losses to the least and maximize our gains in the art of trading. If we can find a way to use 1:4 or 5 risk to reward in trading, i believe we wont be dwelling on our stop losses being hunt by liquidity providers or big dogs. Because take it or leave it, its there daily practice and we cant escape it no matter how perfect we analyse the market.
In order for this to be achievable, i figured out the time frame used in analysis will determine the amount of stop losses to be used in trading. The fact is time frames like 15 or 30 minutes will produce smaller stop losses, which will always minimize risk. Whereas time frames like 4 hours or Daily would be perfect for setting take profits for trades, all this depends on your trade set-ups and your analysis (both fundamental or technical) in general. This approach applies if you are an intra day trader, swing trader, news trader or position trader, it doesn’t apply to scalpers.
Some traders consider lower time frames as a form of noise, yes no doubt about this! The higher time frames carry more weight because they display more data and show more time than a smaller time frame does. If you are just studying 5 minute or 15 minute charts all the time, you are missing out on the bigger, more significant picture of the market. However when you become a grand master you will learn how to maximize your profits with higher time frames and minimize your risk with lower time frames. I personally love to analyse the general direction of the bigger time frames and then come to look for good trade set ups on the smaller time frames.
Doing this helps a lot to catch home runs with small stop losses, i know its not easy but with constant practice, it is achievable. Nothing is impossible in the world of trading, so do not limit your mind!