ALWAYS USE A STOP ORDER

                       I get at least one e-mail each month from a trader who has let a bad trade
get away from him. Usually the trader did not place a stop order on his
trade and the market moved against him, creating a significant loss. Closing

a trade at a loss can be very difficult for traders, especially new traders who
haven’t built a callus against the sting of losing real money. Automating the
exit of a bad trade is important because some traders will continue to hold
a bad trade, hoping and praying that the market will at some point returnin their favor. I’ve seen some traders stick with a position even as their
accounts are drawn down 10 to 40 percent or more. Nobody likes losing
money, but you must cut a loss quickly or you will not have any money left
to trade again. Stop orders help remove the emotions involved with closing
a bad trade by taking the decision out of your hands and authorizing your
currency dealer to close it for you.
Stops are only effective if you leave them alone. Some traders move
their stop further and further from the entry point, to give the trade more
room. This is no different than trading without a stop, in my opinion. Once
you have determined the best price at which to put a stop order, leave it
alone! Moving a stop order is a horrible habit to get into and will lead you
to take on more risk per trade and may lead your account to ruin. When the
trade goes bad, let the stop loss do its job and take you out of the market.
It is far better to be out of the market and looking for another good trade
than married to a bad one.

Placing Stop Orders
Stop orders are effective only if you know how to place them correctly.
Traders often complain when their stops are triggered only moments before
the market moves in their favor. These traders likely do not know how
to place stops correctly and will continue to get stopped out prematurely.
You should ask yourself two questions when you’re looking for a place to
put a stop order:

1. Where has price already proven it hasn’t traded at recently?
2. At what price will I know my trade is invalid?

Your stop should be placed at a price you know the market hasn’t been
able to trade at in recent price history. Support and resistance zones offer
areas above or below the zones at which price has proven it is unable to
trade during recent price action. These areas offer excellent places to place
your stop order. You will also know a support and resistance trade is no
longer valid in those areas above or below support and resistance zones
because the zone should not fall to price if your trade theory is correct.
Once a zone is violated by price, it is no longer valid support or resistance
and the trade is invalid.

Figure 4.1 demonstrates the proper place to put your stop order using
a support zone entry. In Figure 4.1 the EUR/USD has set up support
between the round number of $1.4000 and $1.4100. Traders who went
long EUR/USD near the top of this support zone should have placed their
stop below the bottom of the support zone. This ensures that their stop is

located where price hasn’t been able to trade in recent history and is a logical
exit point if the support zone fails to hold EUR/USD from going lower.
Figure 4.2 demonstrates the proper place to put your stop order using
a resistance zone entry. In Figure 4.2 the USD/CAD has established a resistance
zone between $1.050 and $1.1150. Traders who sold USD/CAD near
$1.050 should have placed stop orders above the resistance zone, as shown
by the dashed line. This placement ensures that the stop is located where
USD/CAD hasn’t been able to trade in recent price history. If the USD/CAD
violates this resistance zone and moves higher, the trade is invalid and the
stop placement is a logical exit point.

This process can be repeated on any currency pair and any timeframe.
Placing stops takes some practice, and even by following these guidelines
some trades will be stopped out by spikes in price. Avoid placing your
stops within 15 pips of a round number, because we have already discussed
the attraction round numbers have to price. If you place your stops near a
round number, you are more likely to get stopped out during a spike that
probes the round number looking for stops. Make sure that you are at least

20 pips above or below a round number to avoid being “stop gunned” during
a round-number test. Overall, stops are an excellent tool to manage
risk precisely and take the emotion out of a losing trade through automatic
execution.