If you are a forex trader, you have certainly heard of the concepts of sell stop, sell limit, buy stop, and buy limit. These orders are useful tools for you to control risk. Thereby, take advantage of opportunities and optimizing profits when trading forex. In this article, Learn Forex Trading will help you better understand sell stop in forex.
What is sell stop in forex? Is that important?
Before trading with sell stop , traders need to clearly understand the concept and meaning of this type of order.
Meaning of sell stop order
Sell stop is a type of order to sell when the market price reaches a certain price that you have predetermined. When you place a sell stop order (profit-stop order). The trader is expecting that the price will decrease after reaching that price level.
For example, the market price of EUR/USD is 1.2000. The trader wants to sell when the price drops to 1.1950. Traders can place a sell stop order at 1.1950. When the market price reaches 1.1950, your sell stop order will be triggered. Thus, the trader will sell EUR/USD at the closest possible price.
You can use the sell stop order in many different situations. Below are some common cases where you can apply a profit-stop order.
Use Sell Stop order in Price Action
Price action is a technical analysis method based on observation. Also, evaluate the price action on the chart. Price action does not use technical indicators, but only relies on candlestick patterns, trend lines, support and resistance levels, supply and demand zones, etc.
One of the important candlestick patterns in price action is the pin bar. Also known as long-tailed candles. A pin bar is a candlestick with a small body and long tail. Shows disagreement between buying and selling forces.
You can use sell stop orders to trade pin bars in two ways:
- Trading pin bar reversals.
- Pin bar trading continues.
Breaking support in Forex
A support level is a price level that it is usually difficult for prices to fall below. When the price approaches a support level, the buying force is often stronger than the selling force, causing the price to bounce up. However, if the selling force overcomes the buying force, the price could break the support level and create a new downtrend. At that time, the old support level will become the new resistance level.
Why should you use Sell Stop?
Sell stop is a type of order that has many benefits for forex traders. Especially when trading trends or breakouts. Here are some reasons why you should use profit stops.
Limit risks when trading Forex
When you use the sell stop order. Traders can limit risks when trading forex by:
- Set your stop loss at a reasonable price. Not too far from the price that triggered the order. This way, you can limit your maximum loss if the price goes against your prediction.
- Set your take profit at an attractive profitable price. Not too close to the price that triggers the profit stop order. This way, you can take advantage of opportunities when the price moves in your desired trend.
Reduce time spent monitoring the Forex market
When you use the sell stop order. Traders do not need to constantly monitor the market such as economic indicators, news, world gold price, etc. You just need to analyze the market carefully. Determine the price at which you want to sell, set a stop profit order, and let the market do the work for you. You can spend time on other things, like studying, resting, entertainment, etc. You can also avoid negative emotions when trading. It can be mentioned as the mind such as anxiety, fear,…
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Get ahead of the trend with Sell stop Forex
When you use the sell stop order. Traders can catch a new trend when the price breaks an important price level. You don’t need to wait for confirmation from technical indicators or candlestick patterns. Traders just need to trust their analysis.
Traders can start trading earlier than other traders. At the same time, it is possible to take advantage of most of the trends. You can also avoid false or late signals when trading with the trend.
Which strategy is best to apply to sell stop orders?
Sell stop is a flexible order type and can be applied in many different trading strategies. However, there are several strategies where profit stops can best maximize their effectiveness.
Sell stops appear best during Break-out
Break out is a situation when the price breaks a key price level. These include trend lines, support and resistance levels, supply and demand zones, etc. Thereby, creating a new trading trend. Break out often takes place when there is important news, such as economic reports or interest rate decisions. Or when there is the participation of large traders, such as central banks and funds. Breakouts often have strong momentum and last for a long time.
Place a sell stop order when the breakout is in line with the trend
When you notice a break out occurring in the direction of the current trend. You can place a sell stop order at a price slightly below the breakout price. When the price drops your stop profit order is triggered. At the same time, traders will sell and expect the price to continue to decrease according to the new trend. You can set a stop loss at a price above the breakout price and a take profit at a price below the next support level.
Sell stops appear when the breakout reverses the trend
When you notice a break out occurring in the opposite direction of the current trend. The trader can place a sell stop order at a price slightly lower than the breakout price. When the price drops activate your order. Traders will sell and expect the price to continue to decrease according to the new trend. You can set a stop loss at a price above the breakout price and a take profit at a price below the next support level.
A spike strategy is a trading strategy where you place multiple sell stop orders at different prices. To catch a strong downward trend. You can use the spike strategy when you believe that the price will drop sharply in a short time. It can be said that when there is important news, you are not sure about the price to which the price will drop. By placing multiple orders, you can increase your chances of catching a downtrend and optimize profits.
You can use the sell stop order in the spread strategy as follows:
- Determine a price range in which you want to place sell orders.
- Place orders at equally spaced prices within that price range.
- Set the stop loss for each order at a price slightly higher than the trigger price.
- Set the take profit level for each sell order at a fixed price lower than the trigger price.
Place a sell stop order with sideways markets
A sideway market is a situation when prices fluctuate within a certain price range, with no clear trend. Sideway markets often appear when there is a balance between buying and selling forces, or when the market is waiting for important news. Sideways markets can last for a short or long period, depending on the market situation.
You can use the sell stop order to trade the sideways market as follows:
- You must define a price range within which the price fluctuates, for example from 1.2000 to 1.1900. You must also identify a price level outside that price range if the price breaks out. You would consider the market to have exited the sideway, for example, 1.2050 or 1.1850.
- You place an order at a price slightly below the bottom of the price range. Example 1.1890. You also place a buy-stop order at a price slightly above the top of the range, for example, 1.2010.
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Sideways market
To use the sell stop order effectively and safely. Traders need to follow some of the following principles:
- You must have a clear reason to place a sell stop order. Based on technical analysis, fundamental analysis, and trading strategies.
- You must determine the price at which you want to sell. Based on important price levels, such as trend lines, support and resistance levels, and supply and demand zones.
- You must define a stop loss and a take profit level for the order. Based on the risk/reward ratio, the price matters.
- You must check the order parameters before placing the order. To avoid errors or confusion. Traders must also monitor your sell orders after placing the order. To adjust or close orders when necessary.
Example of how the sell stop order works
To illustrate the working principle of the sell stop order, we will give a specific example as follows:
Suppose you are trading the EUR/USD currency pair, and you analyze that the price is in a downtrend. You want to sell when the price breaks a downtrend line, which you have drawn on the chart. You decide to place a sell order at the price of 1.1800, which is a price slightly below the downtrend line. The trader places a stop loss at the price of 1.1820, which is a price slightly above the downtrend line. You set your take profit at 1.1700, which is a fixed distance below the trigger price. After you place a sell stop order, you wait for the price to move.
- If the price drops and reaches 1.1800, your sell order will be triggered and you will sell EUR/USD at the closest possible price. You expect the price to continue decreasing following the new trend. And hit your take profit at 1.1700. At that time, you will close the order and take profits.
- If the price rises and reaches the price level of 1.1820, your stop loss will be triggered and you will close the order with a small loss. You notice that your prediction was wrong and the price did not break the downtrend line. You accept the loss and wait for another trading opportunity.
Instructions on how to set sell stop forex on MT4
To place a forex sell stop order on MT4, you can follow these steps.
Step 1: After analyzing the chart on the MT4 platform. Traders press the F9 key or click on the New Order item (add a new order) on the toolbar to open the order placing dialog box. In the Type section, select Pending Order. Then, you select sell stop in the Pending Order Type section.
What are the limitations of sell stop forex?
Sell stop is a useful order type, but there are limitations and risks that you need to be aware of when using it. Below are some limitations of sell orders.
Risk of stop hunting when using sell stop order
Stop hunting is a phenomenon when the price fluctuates strongly in a short time, to trigger the stop losses of many traders, and then return to the original trend. Stop hunting often occurs when there is important news. Or when large traders are involved, like central banks, investment funds, etc
When traders use sell stop orders. Traders can be affected by stopping hunting if they set their stop loss too close to the trigger price. At that time, your order may be closed with a large loss. While the price still moves in your desired direction. To avoid stopping hunting, you need to set your stop loss at a reasonable price, neither too far nor too close to the trigger price. Traders also need to monitor the market and adjust stop losses when necessary.
Risks when placing sell stop order far away
Another risk when using sell stop order is when you place the order too far from the current price. You may then miss out on trading opportunities when the price does not drop to your trigger price. You may also be affected by small price fluctuations. Cause your sell order not to be activated or to be closed early.
To avoid this risk, you need to place a sell order at a price close to the current price. However, it is necessary to ensure that the price can fall to that level. Traders also need to determine a reasonable profit-taking level, not too far from the trigger price, to optimize profits. Therefore, traders can start with demo trading to gain experience.
The Sell stop is a type of order to sell when the market price reaches a certain price that you have predetermined. Sell stop is different from other types of orders as follows.
Compare Sell limit and sell stop order
A sell limit is a type of order to sell when the market price reaches a price higher than the current price you have predetermined. When you place a sell limit order, you are expecting the price to rise to that price, then turn back down. For example, the current market price of EUR/USD is 1.2000. If a trader wants to sell when the price rises to 1.2050, you can place a sell limit order at the price of 1.2050. When the market price reaches 1.2050, your sell limit order will be activated and you will sell EUR/USD at the closest possible price.
Sell stop and sell limit are different in that:
- A Sell stop is used when you want to sell against a downtrend or break a key price level.
- While sell limit is used when you want to sell when the price reaches the highest possible price. Or reverse an uptrend.
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What is the difference between the buy stop and the sell stop limit?
A buy stop is a type of buy order when the market price reaches a price higher than the current price you have predetermined. A sell top limit is a type of order that combines sell order and sell limit. When a trader places sell stop limit order. Buy stop and sell stop limits are different in that:
- A buy stop is a type of order to buy when the market price increases to a price higher than the current price. It is a type of sell order when the market price drops to a price lower than the current price. However, there is a price limit.
- Buy stops are used when you want to buy into an uptrend or break a key price level. While sell stop limit is used when you want to sell when the price drops to a certain price. However, I don’t want to sell at too low a price.
Buy stop and sell stop limit
So the article on Learn Forex Trading has introduced you to sell stop. This is a type of order to sell when the market price reaches a certain price that you have predetermined. Stop profit orders have many benefits for forex traders. Including minimizing risks, reducing time spent monitoring the market, and staying ahead of trends. You can use sell orders in many different situations and strategies.
FAQs:
What is a sell stop?
A sell stop is a type of order to sell when the market price reaches a certain price that you have predetermined. This type of order has many benefits and helps minimize risks for forex traders.
When should sell stop be used?
You can use the order when you want to sell in a downtrend, breaking an important price level. Or catch a new downtrend.
How is the sell stop different from the sell limit, buy stop, and sell stop limit?
Sell stop is different from buy stop in that this is a type of order to sell when the market price drops to a certain price. While buy stop is a type of order to buy when the market price increases to a certain price.
