Tuesday, January 6, 2009
'Stops' are Risk control and Profit management tool in currency trading.
Stops are 1) Risk control tool 2) Profit management tool.The first protective stop (stop loss) is the initial risk control tool.Placing a stop loss limits our losses to a predetermined level in the event of an unfavorable move in the currency markets which often occurs in currency markets.How much you want to lose is a money management decision. Keeping a planned loss below 2% of your equity is a good money management rule.'Market goes your way'.You move your stop loss to entry point, then the stop now becomes the profit management tool.You are now holding a risk free trade, continue to let the profits run until your objective is reached.If something changes you simply exit the trade with what you have in it at that point.Your profit potential improves when you allow the market to behave as it needs to move on the way to your objective.You should also be aware of the negative characteristics of the stops.The number of profitable trades is sometimes reduced since these stops may allow modestly profitable trades to turn into losses .Also occasional large retracement in open trade profits can make the use of these stops quite difficult psychologically. No currency trader enjoys seeing large profits reduced to small profits or watching profitable trades become unprofitable.Your trading capital is your life blood in currency trading.Hence your first goal is to protect your 'currency trading capital'. Your second rule is only 'to maximize your profits'. Good trading for all readers.Muraleedharan http://forexcentral.googlepages.com