You can say anything you want about the latest run-up in the markets. You can say all the markets are drunk on these newfound “green shoots’…or traders are on a “sugar high” as all assets continue to climb…or you could argue this is actually the start of a sustained recovery.

As someone who is so close to the markets, I can honestly say there are traders on both sides of this argument right now. But the only thing that everyone knows for sure is that the markets continue to sail higher…and they could sink just as fast.

That’s why there’s never been a better time to place stop-losses on every single currency trade you’re making right now.

I don’t care if you’re buying stocks, currency ETFs or currency pairs in the Forex market…you absolutely MUST have a stop-loss on every single trade you place from here on out.

For all ETFs: It’s best to place your stop-loss at 15 – 20% loss, depending on your risk tolerance. This is fairly simple to do. You can create a “mental stop” – which involves watching the markets and dumping your ETF as soon as it reaches your stop-loss level. Or you can arrange it with your broker to sell at a particular level.

For Forex trades: You place a stop-loss at the point where the market will prove you wrong in your trade. You can also place a stop-loss where you have risked the maximum amount of your account that you are willing to lose on that particular trade.

So one way to do this, is to identify areas on the currency chart that show signs of support. Place a stop below that area. That way, if support is broken and a new downtrend emerges, you don’t ride it all the way down and give up your account balance in the process.

Your Stop-Loss Goes Under the Support Line!

However, another approach is not only to analyze this aspect but also to analyze the potential damage to the account percentage too.

So before you place the trade, look at your entry and your stop-loss price. How many pips is the difference between your entry and stop? (You can find this out by looking at any chart.) Once you know the difference in pips, multiply that number by the number of lots that you are considering investing in. How much does that equal in dollars? Ask yourself: Are you willing to risk that much?

If it’s over 1-5% of your account balance, I’d suggest investing in fewer lots.

I’ll be back soon with further hints to help protect your capital. Till then…

Happy Trading!
Sean Hyman, aka Professor FX