The importance of stop loss EA lies in its ability to help prevent excessive losses by automatically closing a trade once a preset level has been reached. The level of a stop loss is usually fixed at a price below the buying price once a trader places a buy order. Conversely, the stop loss is fixed at a level higher than the selling price when a sell order is set off. It should, however, be noted that the exit strategy a trader chooses must be in sync with his trading system and entry strategies. When a breakout system or a contrarian system is used, the stop loss EA must not be large so as to ensure that once a trade turns bad, the trade is exited automatically. When a trader uses the trending system, the level of stop loss could be set larger to allow the trader more time to trade. The aim of setting the stop loss is to minimize a trader’s loss in any single forex trade. However, there are different types of stops that could be brought into a trading system.
Initial stop and trailing stop are two of the stop loss EA strategies. Generally, initial stop is set at the beginning of every trade, and it is very useful in estimating the size of the position that would be proper for trading. Initial stop spells out the maximum loss that a trader will take on any trade. Trailing stop, on the other hand, is a product of the market movements, and its usage lies in assisting a trader secure some level of profits whenever trading becomes favorable. This strategy works in such a way that, as the trend builds up, the price movements is trailed by the stop so that should there be a trend reversal, the profits realized is preserved.
Moving average trailing stop, two bar trailing stop, parabolic SAR trailing stop, channel trailing stop and average true range trailing stop are some of the stop loss EA strategies. The two bar trailing stop strategy is perfect for market conditions where a trend reversal is probable. Average true range trailing stop, otherwise known as ATR indicator, is mostly used by traders who follow trend or turtle traders for ascertaining how volatile the market is so as to enable them protect their profit by fixing the stop loss far from a highly volatile level. Channel trailing stop is also popularly used among the earlier mentioned sets of traders – trend following traders and turtle traders.
It is a necessary thing for stop loss EA strategies to be decided based on the dynamics of the market. And when we talk about dynamics of the market, we mean the prevailing conditions of the market. It is very important to take this market dynamics into cognizance when planning for a trade as it would give a trader an idea of things to do so that he does not close his trade prematurely when there are opportunities for more profits to be made.
Warren Seah
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