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The use of stop loss is very important for risk management in forex trading. Before entering into any trade, you need to be very clear on the level of risk that you will take in that trade. Suppose, you spot a high probability swing trade setup with risk to reward ratio of 1:3!
How do you calculate the Stop Loss?
Your risk is the amount you are willing to lose if the trade goes wrong. Suppose, you are willing to lose $500 in that trade. $500 translates into 50 pips on a standard account. The reward is your profit target. It should be $1,500 or 150 pips to give you a risk to reward ratio of 1:3!
Some traders may not be comfortable with 50 pips stop loss (SL). You are the best judge on how much risk you want to take. In swing trading on higher time frame charts like the daily chart, you will have to use a SL between 30-50 pips in order to give the trade some room to work out. Too tight a stop loss something like 20 pips and the chances are that it might get tripped s...
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