25 July, AtoZForex – Stop loss also referred as SL is like the first aid kit during an accident, it saves trader lives. You can also view it as a bungee rope when diving from a cliff. Whatever it may be, traders often have no idea about the correct use of this account saving tool. Proper use of Stop Loss can also increase your profitability and this is exactly what we will be discussing during this how to use SL to increase profitability article.
Use SL to increase profitability
We can define four key methods to crease our profitability using Stop Loss.
- #1 Moving SL below/above key levels
- #2 Not moving SL to breakeven point
- #3 Moving SL to breakeven point
- #4 Using SL to follow the trend
#1 Moving SL below/above key levels
This method applies in most cases and should be used most frequently. Traders often believe that markets are ideal. But in reality, with too many opinions around, major key levels are often exceeded from the shier market momentum. Hence it is advisable to add from 5 to 10 pips gap to an initially chosen SL level. Although this will increase your SL size, the level will be hit fewer times and thus increase your profitability in the long run.
#2 Not moving SL to breakeven point
Often traders move their Stop Loss levels as soon as price action moves in their favour just to save them from potential pain to see their order in negative again. But what happens is that the pair technically corrects, hits their SL, and continues trading higher.
Therefore, you should avoid moving your Stop Loss to breakeven point. Though this applies in ranging markets when you believe continuation will take place.
#3 Moving SL to breakeven point
However, there are few exceptions to the above statement. You should move your stop loss to breakeven point when you are uncertain or see that your analysis is wrong. Either that or take any profit that you made.
#4 Using SL to follow the trend
Stop Loss can also help you to take advantage of a trending pair to increase profitability. To simply determine if the pair is trending or not you can use 2 MAs and look for 30 to 45 degree angle parallel trend. After determining the currency pair’s phase, you can move SL to subsequent lows for as long as the pair continues to trend until it reverses.
In conclusion, we increase profitability in Forex using SL by losing less.
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