Besides the four main types of stop-losses discussed above, stops can also be grouped into static and dynamic stops.
A static stop is quite simply – static. Once placed, they remain at their level until the stop gets triggered or you close your position manually.
Bear in mind that any type of stop-losses can be static or dynamic, depending on your trading style and strategy. A chart stop can be either left at its initial price-level or moved to adapt to changing market conditions (e.g. to a new support or resistance level.) Similarly, a volatility stop can be placed at the average weekly volatility of a currency pair or moved each day when used the daily volatility.
When placing a static stop, the potential gain has to be considered. The risk-to-reward should be at least 1:1 or higher to take the most advantage of your average win rate over the long run. According to a research conducted by a large Forex broker, traders who use a reward-to-risk ratio of at least 1:1 (i.e. they’re risking $1 to make $1) are on average 3 times more likely to turn a profit than traders who didn’t adhere to this rule!
Dynamic Stops – Chasing the Flux
A dynamic stop-loss order is based on an indicator such as a moving average or a volatility indicator in order to remove any guesswork from the decision and determine a point after which the trade idea becomes invalidated. As its name suggests, a dynamic stop is not static. It moves with the current market conditions and the underlying indicator to whom it has been attached.
Popular indicator setups for dynamic stops include simple and exponential moving averages, such as the 100-period of 200-period EMAs. The 200-day EMA is especially important since a large number of traders are following that indicator and make their trading decisions based on it. The 200-day EMA (or any other longer-term MA) are also often used as a dynamic support or resistance level, so watch out in times when the market approaches one of those MAs.