The Importance of stop loss in forex trading.


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Stop-loss and take-profit (SL/TP) management is one of the most important concepts of Forex. Deep understanding of the underlying principles and mechanics is essential to professional FX trading.

What is Stop Loss order?
A stop-loss order is an order that automatically closes a losing position once the price hits the pre-specified level.

Let’s say you’re trading stock XY and you buy the stock at $50. You don’t want to hold the stock if the price falls to $45, so want to sell it and close your position at that level.

There are two ways to do it: You can either follow the price and close the trade manually as soon as the price falls to $45, which is a so-called “mental stop”, or you could simply place a stop-loss level at $45 which automatically closes your trade when the price reaches your order.

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Why Stop Loss is important?

Forex markets are indeed very risky if not adequately protected. Now, using the stop loss and limit orders mentioned can help protect assets. However, some people can’t accept losses, leading to choose to forgo the orders.

Some professional traders will then use options as a type of stop loss, but that is a much more complex strategy. So, traders must focus on the time trade has proven their thesis incorrect.

How a stop order works?
It’s important to understand that a stop loss order is an order type known as a ‘stop order’. The way a stop or executes is different other order types like a limit order, which is used in a take profit order. Where as limit orders execute at the limit-price or better, a stop order executes at the next best available market price after the stop order is triggered.

Such as: If you are buying the currency pair EUR/USD at 1.47739 and you want that the position should automatically close when it is moving 100 pips against you, a stop loss order is set at 1.46739. In case you are short, the stop loss order is placed above the existing or the current price, 1.48739. In a nut shell, using a stop loss order may limit your profitability but it doesn’t allow loss to assume a larger proportion.

Types of Stop Losses
While a stop-loss order is always a stop-loss order, they differ in the way how traders are using them. Depending on how traders identify potential stop-loss levels, there are four main types of stop-losses – charts stops, volatility stops, time stops, and percentage stops.

1. Percentage Stop
A percentage stop loss order is exactly what it sounds like. Instead of telling the broker at what exchange rate you’d like your order to be closed, you simply tell them what percent of your entire invested amount you are ready to lose.

2. Chart Stop
A chart stop is the most common stop loss order of them all. Imagine that you are looking at a EUR/USD chart. The exchange rate is 1.2321, but you think that it may increase to 1.2401 in about an hour but you’re not really sure. Other signs say that it could even drop to 1.2296. So, what you do is you place a stop loss order at 1.2300. If the exchange rate drops to this amount, it’s almost guaranteed to continue falling, so it might as well cut your losses short with this order.

3. Volatility Stop.
Volatility is something traders don’t want to miss. It can differ dramatically from asset to asset, thus making a tremendous impact on trading results. Knowing how much a curref pair or a stock can move will help greatly in determining optimal stop-loss points.

4. Time Stop
As their name suggests, time stops refer to closing a trade after a pre-specified period of time. For example, a trader who is day trading the market could close all of his open trades after the end of the trading day, while swing traders who don’t want to hold their trades over the weekend could simply close all trades by the end of the Friday trading session.

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Every trader should use a stop loss because it helps us lower our risk from an unprecedented market. But before setting a stop loss, one should have a trading goal. Right placement of sl is very important.
It's very common to wipe your entire profits just because you weren't focused enough. If not prevented, this little mistake can prove catastrophic. Therefore, It's necessary to make stop loss a part of your risk management strategy and use it in every trade you are going to take.
This is the best detailed explanation I've read about stop loss.
Stop loss is among crucial risk management tools that every trader needs to apply, otherwise a trader can lose all his profits in the snap of a finger.
Stop loss can be your savior when the market is taking unwanted dips and you want to minimize your losses. Just do the right calculations and place them at the right level.
You may regret using a stop loss at times because it can limit your profits on some trades, but mostly it is safe to use a stop loss. It restricts your loss from getting amplified and takes you off the trading floor during unfavorable market moves.
In a highly volatile market like forex, stop loss should be an integral part of every strategy. Otherwise a large losing position can wipe out your entire account and sometimes more than the capital invested. Stop loss can be of different types based on how you identify it but whatever be the case, you should never avoid using stop loss order on every trade you take.
Stop-loss is an important concept in trading as it minimizes your losses in case you are not keeping an eye on the trade.
Stop-loss is one of the most effective risk management tools in forex trading. You can avoid bigger losses during a trade by using it. I never trade without using a stop-loss.
Stop-loss saves you from incurring huge losses in case the market takes an unexpected turn against you. It is one of the most important tools a trader can use to manage risk.
Stop loss is meant to help you save your money by not letting you lose more than you can afford to lose. And it’s obvious that if you will be able to protect your capital, you will be able to trade for a longer period of time. Depending on the stop loss you are using, you can open your trading positions while considering the risk you can take.
I agree with all the comments here. Undoubtedly, your stop loss won’t let you lose more than you want to. But what if you had better chances of making money but a little market fluctuation triggers your stop loss? Won’t that be a waste of a trade? Just a thought!
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