It is very easy to enter a trade but it is incredibly hard to exit a trade. When do you cut your losses and when are you satisfied with your profits? Because of the high volatility of the Forex market losses can easily be turned in to profits and profits can become losses in a matter of seconds. You will need to have some kind of system that will protect you from unnecessary losses and help you gain high profits.

Stop Loss Order

You can not become a successful Forex trader if you don’t have a good system. A system will contain certain forex indicators but also placing the right stop loss orders. You will either go short or long based on the performance of the market and based on historical and economical facts. Based on these facts your expectation is that the trend is bullish or bearish. Comparing support and resistance levels will help you deciding what stop loss orders to place in order to secure your profits and lower your losses.

Placing a stop loss order will always be a certain amount of pips above or below the current price and the width of your order will be dependent on your margins and how aggressive or conservative you are. The problem with placing these orders is that although prices may keep rising, you will be stopped if your profit is reached. Making profits is a good thing, but if you were able to double your profits if you weren’t stopped than a stop loss order is a bad thing. An alternative is placing trailing stops instead.

Trailing Stops

Instead of placing your stop and loss order, with trailing stops you will enter a certain percentage where you want to exit. For example, you could decide that you want to enter a 10% trailing stop on a bullish trend. This means that as long as the price is rising, you will not exit the trade unless there is a reverse of 10% of the actual price. This is a very good way to increase your profits and lesson your losses. There are different trailing strops strategies which you can use.

Momentum based Trailing Stops

With a momentum based trailing stop you are actually working with emotions which is not always a good thing to do. Instead of exiting at a certain price, you will wait until you believe the trend is changing. Some people use technical criteria which will decide if they exit a trade. An example of this could be when the price has consolidated for 3 following days which could mean the market is going reverse. Other traders use a rolling stop system which has no discipline at all and is purely based on emotions. The momentum trailing stop is a very risky way to trade and it can give you very high profits but also massive losses. It certainly is not the right system for beginning forex traders.

Parabolic Stop and Reverse Trailing Stop

The parabolic SAR is a basic Forex indicator but it can also be used as a stop loss system.  The practice behind this is that it will place a new order directly after you have exited a trade, following the trend. If you went long and the market is reverse than it will directly place a new order following the short position.

If you are in a very volatile market than this is an excellent way in following the trend but if the market is choppy than using the Parabolic SAR is not such a good idea. When the trend is not clear you will continuously stopped out of trades which will increase your losses. Another disadvantage is that when your stop signal is never reached it will not do anything and not give you any additional buy or sell signals.

Conclusion

Deciding what strategy you want to use will be highly dependent on how aggressive or conservative your trading style is. For a beginning trader it is highly advised to use stop loss orders instead of trailing stops because of the high risks which are involved. Once you are experienced you can try to place some rolling orders. Don’t forget that all systems are dependent on the flow of the market.