While we recommend traders always use a protective stop when in a trade, identifying that stop level can be a daunting task for new traders.
One thing we do not recommend is using a fixed amount to risk on each of your trades. An example would be risking 25 pips on every trade, no matter what pair you are trading. The reason we don’t recommend this is that the daily range of two currency pairs can be very different. The daily range of the EUR/GBP over the last month has been about 50 pips. That means the high and low of the day are about 50 pips apart. However, the daily range of the GBP/JPY over the last month has been about 300 pips. So using the same arbitrary number of pips to risk in both pairs may mean a profitable trade in one pair and a losing trade in another.
We recommend the use of support and resistance to determine your initial protective stop placement. If you buy on a bounce off of support, place your stop below that support level. If you sell on a bounce off of resistance, place your stop above that resistance level. This way your risk level is automatically adjusted to the volatility of the market you are trading. If you are using a 1:2 risk:reward ratio where you look for twice your risk in potential profit. Your risk and reward are now both adjusted to the pair you are trading. This will keep you in more trades which increases your chance of success.
Tom Long is a very experienced forex trader and instructor of FXPowercourse.com, a forex training site of
forex broker FXCM.com
