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Why Your Stop Losses Are (Probably) Wrong

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When you start to learn about trading, you'll come across plenty of material about minimising risk and money management, because they're two of the most critical areas of the business. 


Learning to manage risk and preserve trading capital is fundamental to a successful trading journey. 


One area the literature focuses on is the use of stop losses. A stop loss is simply a price level beyond which you choose not to run an unprofitable or losing trade.


But for me, stop losses are one of the most misunderstood tools in a trader's arsenal, and I wanted to offer a different perspective than what is usually found in the research.  


I'll give you a hint; it's in the name!


Knowing your risk

It's important to know the risk you are taking on any given trade, this can be calculated by multiplying the distance of your stop loss, from the entry-level of your trade, by the notional size of your trade.  


In theory, this simple calculation determines the maximum risk or loss that you face on a given trade. I say in theory because that risk figure is not cast in stone.  


Firstly, if the stop loss you use on a trade is just a mental one, i.e. a figure that you have chosen, (but will watch rather than attach to an order), then it will be down to you to monitor price action and trade it. That's a sure recipe for looking like a maniac checking your platform or mobile app every second you get.


Systemise your process

Rather than rely on them being in front of the screen to close a trade (which in a 24/5 market is not that realistic), many traders will place a stop loss to an open position. This is essentially creating an instruction to close the position should the price of the underlying instrument reach a pre-set level.


In doing so, traders are systemising this part of their trading. On the face of it, that sounds like a good idea doesn't it? 


But what if that automated stop loss level was defining the loss you make on a trade and eating away at your trading capital, not protecting it?  


The use of a stop loss should be what its name suggests – the prevention of a loss, not the realisation of losses as 90% of traders currently use their SL for.  


Crowding together

Here's the thing. Traders of all sizes fall foul of "clustering" which means they place their stop losses in the same areas, at the same time.  


For example, at or around round numbers, (e.g. USDJPY 110) just above or just below a moving average or indeed close by the same support or resistance levels everyone else is keenly watching.  


The market is aware of this behaviour and is often on the lookout for these clusters of stop losses. When they are, it's known as a stop hunt.  


But what exactly does that mean? 

Well, a big bank (a price "Maker") might see on their books that they have a cluster of orders around 1.10 on EURUSD, and then be willing to commit large sums of capital to "hunting down" that stop loss level. They do this by moving the underlying price towards it, in a selfish way, to reward themselves, rather than because of natural order flow (and they wonder why they have bad reputations!).  


As an aside, a broker such as Fusion Markets, that typically services "retail" clients, e.g. mum and dad investors, often get accused of doing the same thing, despite the fact we are a price "Taker" not a price "Maker", and have no control over the prices coming through to you, as a client.  


Think about it if the market can find these groups of stop losses and trigger them, then that's easy money for the banks and traders who have the opposing view and positions.  


Remember that in FX trading there is a winner for every loser and vice versa. A successful trader endeavour's to be on the winning side of that relationship more often than not.


A different approach to stop losses

Are we saying then that you should trade without a stop loss? No, we are not! 


But what if we took a different approach to stop loss placement? Instead of lining up to provide a free lunch for the banks, what if we placed our stop losses above our entry price rather than below it?   


Of course, that means that we'd have to risk-manage our trades in a different way.


For example, employing less leverage and taking smaller positions relative to our account size. But that is really what we should be doing anyway. And of course, we would have to monitor performance closely in a trade's early stages, as we should.  


However, if the trade we have taken is the correct one, then our position will soon be on-side, and once we have a buffer between the current price and our entry-level. Then, our stop loss can be locking in profits rather than minimising (or realisation of) our losses.  


Trailing a stop-loss behind a profitable position is something of a holy grail in trading it's often talked about, but rarely seen in the markets. By not acting like the crowd, maybe we can turn the tables on the stop hunters.  


What are you waiting for? Why not stop your losses in the way they're supposed to be stopped? 





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Relevant articles

Market Analysis
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Strategic View: Planning For 2025

Read Time: 7 - 9 Minutes.


There’s already been some fantastic volatility in the forex market this year – mainly attributed to Trump, but also ongoing discussions around monetary policy in key economies. 


Even if you’re a short-term trader, it’s important to look ahead and form a strategy for the year. There’s currently a convergence of high U.S. real yields, central bank policies, and geopolitical risks that all traders need to keep on their radar. 


In this post, we will discuss the current themes for 2025, as well as identify ways in which we could capitalise on them. 


 

  1. The U.S. Dollar’s Strength and Global FX Implications 

The dominant theme in the FX market this year is the continued strength of the U.S. dollar (USD), fuelled by not only by Trump, but also high real interest rates and economic divergences.


Following what’s called the "red sweep" in the 2024 U.S. elections, markets have shifted expectations towards persistent USD strength in the first half of the year. 


There’s several factors contributing to this trend: 


  • High U.S. Real Yields: Elevated interest rates in the U.S. continue to attract capital inflows, ultimately reinforcing the greenback’s strength. 

  • Diverging Monetary Policies: Whilst the Federal Reserve remains cautious about rate cuts, the European Central Bank (ECB) and Bank of Japan (BOJ) are expected to ease policy further. 

  • Tariff Risks and Trade Policies: Anyone watching the headlines would be aware of Trump’s recent rampage on tariffs – these new tariffs could further support the USD by dampening foreign currency demand. 

Volatility Strategies will be the play here, with policy uncertainty and trade negotiations in the air, options-based strategies such as straddles or volatility swaps on USD pairs could become very attractive. 

 

2. Carry Trade Opportunities in High-Yielding Currencies 


With real interest rate differentials widening, carry trades remain a key theme in 2025. The market is favouring currencies with strong yield advantages, such as the U.S. dollar and select emerging market (EM) currencies. 


Key High-Yield Currencies: 

  • USD: The dollar’s rate advantage makes it a prime funding currency. 

  • CAD: Despite trade risks, Canada’s interest rate environment remains somewhat supportive. 

  • NOK: The Norwegian Krone has shown improved carry appeal, as a result of Norges Bank resisting an aggressive approach to rate cuts. 



Trading Strategies: 

  • Long USD/MXN or USD/ZAR: With emerging market currencies under pressure due to trade risks and high U.S. rates, going long USD against the Mexican Peso (MXN) and South African Rand (ZAR) could prove to be profitable. 

  • Short CHF or JPY in Carry Trades: Both the Swiss Franc and Japanese Yen are likely to underperform against high-yielding currencies due to negative real rates. This could provide some attractive carry trade opportunities. 

  • NOK/SEK Call Spread: As Norway’s interest rate stance is firmer than Sweden’s, NOK/SEK longs could offer potential upside. 

 


3. The Euro’s Structural Weakness and Political Uncertainty 


The euro (EUR) remains vulnerable this year due to a combination of economic underperformance and political instability. 


Key Risks for the EUR: 

  • Interest Rate Divergence: The ECB is expected to continue cutting rates, whereas the Fed remains on hold, for now. 

  • Trade War Exposure: Europe is a primary target for new U.S. tariffs, which could add to the weakening of the Euro. 

  • German and French Political Uncertainty: Domestic political risks, including German elections and policy uncertainty in France, add further downside pressure to the euro. 



Trade Idea: 


Short EUR/JPY 


A graph of a stock market

AI-generated content may be incorrect. 

Figure 1 – EURJPY Weekly Chart 


Given Japan’s relatively stable policy outlook and Europe’s tariff risk, going short EUR/JPY remains a key trade. 



Long EUR Volatility 


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Figure 2 – Euro Volatility Index, daily chart 


For options traders, the euro’s downside risks make long volatility positions an attractive hedge against geopolitical shocks. 

 


4. Commodity Currencies 


Commodity-linked currencies such as the Australian Dollar, Canadian Dollar, and Norwegian Krone face some unique opportunities in 2025. 



The Oil Market’s Influence on FX 


Analysts are expecting crude oil markets to remain tight, with OPEC aiming to balance the supply and demand. In doing so, this could lend support to oil-linked currencies such as CAD and NOK, provided that global demand remains resilient. 

Gold and Safe-Haven Flows 




A graph showing the price of a stock market

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Figure 3 – XAUUSD (gold), daily chart 




Gold prices have surged in early 2025driven by fears of tariffs, geopolitical tensions, and central bank buying. Whilst this supports the Australian Dollar to some extent, rising U.S. yields could ultimately cap AUD/USD upside. 



Trade Ideas: 

  • Long USD/CAD on Tariff Risks: The potential for broad U.S. tariffs on Canada could weaken the CAD, making long USD/CAD a defensive play over the long-term, especially given the bullish strength of the USD. 

  • Long Gold as a Hedge: With tariff risks escalating, gold remains a strong hedge opportunity against geopolitical uncertainty. 

 



5. Geopolitical Crossroads and FX Volatility 


Beyond macroeconomic fundamentals, geopolitical risks continue to hold the FX market at ransom in 2025. There’s potential for volatility to stem from: 


  • U.S.-China Trade Tensions: Renewed tensions from Trump could weigh on the Chinese Yuan (CNY) and ultimately spill over to other Asian FX markets, such as the AUD and NZD. 

  • European Political Shocks: Elections in Germany and France could provide sharp moves in the EUR. 

  • Middle East and Energy Market Risks: Any disruptions to oil supply chains would adversely affect energy-linked currencies, such as the CAD. 

Trade Idea: 


Long USD/CNH 


A line graph with black and purple lines

AI-generated content may be incorrect. 

Figure 4 – USDCNH, weekly chart 



Continued pressure on the Chinese economy and potential U.S. tariffs could push USD/CNH higher. It would be wise to look for long opportunities above 7.375. 

 



Final Thoughts 


As we take on 2025, having an understanding of the key macroeconomic drivers, central bank policies, and geopolitical risks is no longer ideal, but necessary. 


  • USD strength remains a dominant theme, with potential for reversals in Q3 & Q4 this year.. providing that the Fed pivots. 

  • Carry trade opportunities favour high-yielding currencies, whilst funding currencies like JPY and CHF face ongoing pressure. 

  • The euro still remains vulnerable as a result of policy divergences and political uncertainty. 

  • Commodity currencies require a more careful approach – with CAD and NOK benefiting from oil strength, whilst AUD could be exposed to further downside risks. 

  • Geopolitical tensions add more ammunition to FX volatility – with the potential to either create more trading opportunities, or disrupt market structure.  


By keeping these key themes in mind, we’re able to form a more structured approach to 2025. Whilst there’s been some appealing moves in the market so far, there’s still plenty of room for trend changes and unexpected volatility. The key going forward is to stick to your trading plan, but expect the unexpected – especially as we begin to see the economic effects of Trumps’ executive orders. 


If you haven’t done so already, check out our post on Economic Indicators here. 


20/02/2025
Market Analysis
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Trump’s Return: What Forex Traders Need to Know About the New Administration


Read Time: 6 minutes


Donald Trump’s return to Office as the 47th President of the United States marks a significant political and economic shift, creating both opportunities and challenges in the forex market. 


Trumps second-term agenda, marked by aggressive trade policies, tax reforms, and deregulation, has the potential to impact global markets in complex ways, especially the foreign exchange market. Fear not; there will be plenty of opportunities to accompany any disruptions that the Trump Administration will bring.

One of Trump’s most critical economic agenda’s is his renewed focus on tariffs. As during his first term, Trump has emphasised targeting China, with plans to raise tariffs on Chinese imports by 10–15%, ultimately increasing tensions between the two nations.


Why does this matter?


China’s economy has direct and indirect influences on markets, primarily through global trade. In 2024, China's foreign trade reached new heights, with total goods imports and exports amounting to 43.85 trillion yuan (approximately USD $6.1 trillion), marking a 5% increase from the previous year. Exports grew by 7.1% to 25.45 trillion yuan, while imports saw a 2.3% rise to 18.39 trillion yuan.

The trade surplus expanded significantly, reaching a record $992 billion, driven by a surge in exports, particularly to the U.S. So, you can imagine how Trump’s focus on tariffs could affect this.

Other proposals include broad tariff hikes, with some extreme scenarios suggesting across-the-board levies of up to 10% or a staggering 60% on Chinese goods. Such moves, while aimed at protecting American industries, carry substantial implications for global trade flows – which will of course affect currency rates.

The U.S. dollar, often a safe-haven currency as we know it, has provided an impressive bull-run recently;

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Figure 1-DXY (US Dollar Index) Daily Chart



There are essentially two scenarios:

  1. A weaker USD

    In his first term as US President, Trump openly said the dollar (USD) was too high. And now, in his second term, he’s singing the same tune. This could provide some fantastic opportunities for us forex traders – especially when currencies such as the AUD and NZD are severely undervalued.

  2. Continued dollar strength

    We could see further strength if global investors react to heightened uncertainty and anticipated inflationary pressures.

Overall, it’s likely that continued tariff increases will disrupt supply chains and weigh on U.S. economic growth, potentially weakening the dollar in the long term.

In addition to trade, Trump’s fiscal policies have the potential to impact currency prices. The extension of the 2017 tax cuts, along with potential new tax breaks, is expected to stimulate economic growth in the short term but could also widen fiscal deficits, already exceeding 7.5% of GDP. Higher government borrowing to finance these deficits may push up U.S. Treasury yields, attracting foreign capital and boosting the dollar. Yet, sustained fiscal imbalances could lead to long-term concerns over debt sustainability, ultimately eroding confidence in the greenback.

The Trump Administration’s approach to deregulation is yet another factor likely to influence forex prices. Trump’s plan to roll back Biden-era regulations across sectors such as energy, finance, and manufacturing aims to reduce costs for businesses and encourage investment. This deregulation, in addition to tax cuts, could lift business confidence and support equity markets, creating a risk-on environment. In such scenarios, higher-yielding currencies such as our Australian dollar and the Canadian dollar could potentially benefit from improved sentiment and rising commodity prices.


How to Trade Trump 2.0


Monetary and Fiscal Policy Signals


So far, Trump has been on a war path signing off executive orders and pushing to make change. Given that currency markets are influenced by macroeconomic and geopolitical events, it’s imperative to keep an eye on the headlines for potential shifts in monetary and fiscal policies. In doing this, we can stay one step ahead.


Look for Hedging Opportunities


Trump’s presidency previously brought unexpected shifts in international relations, creating geopolitical uncertainty that could impact the forex market; during such times, safe-haven currencies such as the CHF or JPY are typically reliable options. Additionally, if Trump reinstates policies that favour U.S. energy independence, oil-exporting nations such as Canada (CAD) or Russia (RUB) may see increased currency volatility tied to changes in commodity markets.


Be Prepared and Adapt


Trump’s criticism of the Federal Reserve for maintaining high interest rates during his first term suggests potential attempts to influence monetary policy, making the Fed’s reactions critical for USD movements. Policies promoting growth or supply-side inflation could drive rate adjustments, adding to forex market volatility. As traders, we need to be prepared – we know Trump is a bit of a loose cannon, but we also need to adapt to changes in market structure and macroeconomics.


News and Risk Management


Taking all of this into account, we traders need to keep one eye on the news headlines, and one eye on the markets. Stay up-to-date with major news events and avoid trading within close proximity of them, reducing exposure on any open trades.

In the months ahead, expect volatility and surprises. Trump has never been more motivated in improving things for the United States. Given that the greenback is the most important currency to watch, we traders need to be prepared for anything that he throws at us. Traders need to embrace the volatility, identify trends, and keep an eye on the macro-economic influencers that ultimately drive the pricing of currencies.

We provide our clients with an economic calendar and other tools to succeed in the markets – find out more by clicking here.
04/02/2025
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