The GBP/USD is the most popular and the most volatile currency pair of all the major Forex currencies. The reason for its volatility is simply due to its popularity; more traders’ means more movement in the market. This makes the GBP/USD a very profitable currency pair to trade, but it also makes it susceptible to big swings and erratic behaviour.
There are many different strategies for trading Forex including scalping, long term and day trading all of which can be applied to trading the GBP to USD. The one thing that is different with this currency pair is the sizable swings that take place within a trend and these must be considered when placing your stop loss.
Support and resistance levels have always been a good indicator on where to place your stop loss but in the case of the GBP/USD, it is not uncommon for a candle on a chart to spike 20-30 pips past a support or resistance level before returning to its original direction. What can you do about this? Well, the obvious answer is to have a larger stop loss, but you need to consider your risk appetite and how far you are willing to go when it comes to these large swings.
When considering your risk appetite you might also want to consider whether you are more comfortable being a long term trader or a scalper. If you are going to consider staying in a GBP/USD trade for a considerable amount of time then stop losses over 100 pips are not uncommon and in fact, recommended for this type of trading.
The use of EMA’s is a good indicator on where to place your stop loss especially with currency pairs that demonstrate large swings. If you where intending to trade the GBP/USD over a longer time frame then you might want to use two different time framed charts, for instance a “daily” and a “4 hour” the smaller time frame would be your indicator of the trend reversal and the larger to keep an eye on the overall trend.
Using 4 different EMA’S on these charts will give you a good indication of what is happening across the board. In this article, I am just going to talk about the larger of the EMA’s as an indicator for the stop loss and save my other secrets for another publication.
Using an Exponential Moving Average of Nbr periods 34 will give you a good solid background for an overall stop loss. The use of these 4 EMA’s correctly could see you getting into a long term trade early with just a 60 pip stop loss. If you follow the 34 EMA as a stop loss guide you could find yourself in a trade with 100’s of pips in profit and a 200-300 pip stop loss. This does not mean that you have to wait for your stop loss to be extinguished before you get out of the trade; you can wait for the smaller of the EMA’s to cross over to indicate a clear change of direction before you exit.