Are You Able to Set Correct SL?
Putting a safe stop loss and profit target is a nice weapon in forex trading. A risk-aware forex trader should use a stop-loss in every trade. Often some traders make a mistake in setting correct SL that I will describe here.
Sometime you may be faced problem due to hit your stop loss early and make you out from the trade through the chart price does not reach the entry point. This is due to the Ask price and the spread. You may know the terms of BID and ASK price in your mt4 terminal. The difference between the Bid and Ask price is the spread. And due to this difference sometime you may get your SL triggered earlier the chart price reached for the SL price. When you see you got out of the trade by hitting SL before the chart price reach to the SL and then back to the profit zone, but you can’t enjoy the profit because of early hitting of SL and this makes you so disappointing. For this reason, you should know how to place the proper SL to avoid such a situation.
How to Calculate The Correct Stop Loss
Wherever you trade if you know how to place proper stop loss you can be benefited. False SL triggered can create problem mostly on a selling trade for the large spread broker. To avoid this problem we should use the bid price to place SL. The bid price is the original price that shows on the chart and a trade is counted TP/SL hit based on the original chart price. Ask price is larger than the bid price depending on the spread.
As you can see in the above picture the difference between Bid and Ask price is 1.5 pips. The original Bid price is 0.78070 due to spread the Ask price is 0.78085. Ask price is 1.5pips ahead of Bid price and reach to the SL before the original price has been reached and triggered your SL. To avoid spread widening by broker or false triggered of SL you need to add 1.5 pips with your SL. Suppose your SL at 0.78300 you need to 1.5pips that is 0.78315.
So, in case of placing SL of a selling trade, you should add the spread with the SL price
For a buying trade, you can use the original SL because in this case ask price reach later to the SL price than the original Bid price.
You can use Bid price in placing tp also. If your broker’s spread is variable then add the possible highest PIPs of the fluctuating spread range with SL of the concerned pair.