How to Use Traveling Stops in FOREX Trading
Forex trading is the trading of foreign currencies. It is impossible for a forex trader to avoid every loss; the most you can hope for is a trading system that helps you to avoid major losses. The key to this is discipline, and the tool most traders use to reinforce this discipline is a stop loss. For some forex traders a stop loss is an integral part of their trading strategy; for others it is only a mental guide--it depends on the trader. A stop loss is an order placed with a broker to sell or buy a currency pair at a particular price. This is also known as a stop order or a stop market order.
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Instructions
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Review the definition of a currency pair. Forex trades in currency pairs. As an example, the quote EUR/USD 1.2000 means that one euro is exchanged for 1.20 US dollars. If the quote moves from EUR/USD 1.2000 to EUR/USD 1.2010, the euro is getting stronger and the dollar weaker; however, if the EUR/USD quote moves from 1.2000 to 1.1990 the euro is getting weaker while the dollar is getting stronger
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Set your stop loss. Using the example above, let's say you are trading EUR/USD which is currently trading at 1.2000. The general rule is to set your stop loss at a certain level below the price you paid for the currency. The more time you have to make the trade, the more conservative your strategy should be, and the tighter the range for your stop loss. For instance, if trading euro on a daily basis I might keep my stop at 1.1980; however, if trading over a weekly basis I might open the stop loss to 1.1920.
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Adjust the stop loss as the price moves in your favor. This is referred to as a "traveling stop loss." If the price goes up, move the stop up by the same amount. For instance, if EUR/USD goes from 1.2000 to 1.2010 and my stop loss is at 1.1980, I can move my stop loss order up to 1.2000. This allows you to secure or "take" profits. Each time the price moves up (or down), reposition your stop loss in proportion to where it was originally set.
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