If you want to trade Forex you have to pick the direction the currency pair is going in and then you have to place your stop. It's a fact that most novice traders simply don't know how to place stops and they end up getting stopped out and then seeing the trade go back the way they thought piling up thousands of Dollars and their not in. In this article we will look at common errors traders make in placing stops.

The problem with most Forex traders is they try so hard to avoid risk, they actually create it which leads me into my first point...

Scalping and Day Trading Stops – Why Traders Get Stopped Out

Most novices are attracted to day trading and scalping because they think it offers them a regular income with low risk but it's probably the highest risk form of trading you can do because you have no chance of winning – why?

The reason is simple ALL volatility in daily time frames is random, you can't get the odds on your side and you can't win. If you want to win, you need to trade the odds and that means trading longer term time frames so forget this method of trading.

Placing Stops within Random Volatility

Most traders place stops to close when they enter and it's a fact that if you want to make money you need your stop outside of random volatility. You here guru's tell you that you can trade with stops 10 – 20 or 30 ticks away but most of the time when I trade my stops are 50 – 100 pips away as a minimum and its normally a good way back and behind, where everyone else's is likely to be. Most traders stops get picked off and most traders lose – so put your further away and make sure its behind an important support or resistance level.

If you want to trade with wider stops, cut your position size or decrease your leverage. If you do this you will have more chance of winning. Many new traders think that they should use the 100 – 200:1 leverage their broker gives them but 10 – 20:1 is plenty of leverage for most traders.

Trailing Stops to Close

When a trader gets a profit he's pleased and he gets excited - his trading signal has proved to be correct and he feels smug and the bigger the profit gets, the more excited he becomes and also the more nervous he becomes.

As natural pull-backs eat into his equity – he thinks he better take the profit “before it gets away” and eventually he jacks his stop up close to the price and places it inside random volatility and gets stopped out. Next, the trend carries on and he has a small profit banked but he could have had larger one.

The key to success with any currency trading strategy is to run profits and cut losses but most traders - run losses and cut profits and this leads to their demise.

If you want to trail a stop in a big trend, you need to trail it outside of random volatility and this means placing it behind a key moving average or nearby support ( the 40 Day MA is a good one to use in long term trend following) because, trends always run further than most traders think. Sure, you give a bit back at the end when the market eventually turns but you don't know when a markets going to turn anyway, so giving a bit back at the end is fine.

Keep in mind if you made just 50% from every major trend in the market with your currency trading system you would be very rich.

Final Words

If you want to make a meaningful gain, you need to take a risk, this doesn't mean you are rash you just take a calculated risk when the odds are in your favour and if your trading system is soundly based, you will make a lot of money. Also, when running a position, short term equity pull-backs are normal so ignore them and focus on the long term profit at the end.

Most traders consider Forex money management as an area that simply takes care of itself but it's the very foundation of successful Forex trading and needs careful thought in terms of - where to place your stop, to ensure your equity is protected but you have the chance to make some great profits is one of the major challenges a currency trader faces.

I hope the above tips on placing stop losses, will help you explore the key area of money management in more detail.