Money Management in Forex Trading - Four Types of Stop You Can Use

As we said in yesterday's post, you can't be successful in Forex trading without good money management and the discipline to put limits on the risks you take. This means using "stops" or "stop-losses" on your trades. There are four kinds of stop you can use.

1. Equity stop. You decide what percentage of your equity - that is, the amount of money you have in your account - you are going to risk in this trade. The most common percentage is 2%, though as said in the last post many advise a maximum of 1%. The main problem with this type of stop is that it puts an arbitrary exit point on your trade, so that you leave the trade because of your predetermined risk strategy when the market movements might be signalling that it would be advantageous to continue.
2. Chart stop. You use charts to generate stops, based on price action - for example, the swing high/low point.
3. Volatility stop. This is another version of the chart stop, using volatility instaed of price action to determine how much risk you take. In a high volatility environment, you allow more room for risk, and in a low volatility environment, you allow less room.
4. Margin stop. Using this strategy you subdivide your capital into ten equal parts, and only use one segment at a time, thus avoiding using your whole capital in a single trade.

You can experiment with different stops to see which suits you best, but you must practice some form of money management, once you get to the stage of having a full account. If you are just starting, you need to learn the basics first.

And if you are just thinking about starting, Easy-Forex allows you to start trading with a very small amount so you can't incur big risks - AND you have the advantage of their unique personal guidance to make sure you know how to make winning trades. Don't forget too that there is always more to learn at http://www.bizwrite.co.uk/Forex/forexindex.html