Trading the Forex market involves a measurable degree of risk, which ultimately depends on a person’s strategy and risk management techniques. Without proper risk management, a single trade can wipe out your entire account balance overnight. So how do traders protect themselves from a potential bottomless loss on any given trade? This is where a stop loss enters comes in handy. Provided by all brokers on all trading platforms, a stop loss should be used regardless of the trading strategy or financial asset.
What are Stop Losses?
As the name implies, it stops further losses on your open position past a given threshold. How it works is, the trader will specify a price level either on the chart or order box. When a losing position triggers that price level, the position is immediately closed by the broker on behalf of the account holder. Stop loss orders are oftentimes used conjointly with profit targets, which are designed to close a position that reaches a predetermined price target. Depending on the platform you are using, a stop loss order can be found either on the order box, the open positions window, or by right clicking on the trade line on your chart. If, for any reason, you desire to remove the stop loss order on an open position, simply right click on the stop loss order line on your chart and hit “Delete”. This is specific to MetaTrader 4, and may vary on other platforms.
Benefits of a Stop Loss Order
Obviously, a stop loss order can help cap risk by getting out a losing position before market direction moves further against them. This can be especially useful during release of high-impact news that can move the price of a currency pair irrationally or a similar situation. Another useful advantage of a stop loss order is that it reduces stress by automating the process of closing losing positions, which as many novice and experienced traders alike can attest is not an easy skill to master. Last but not least, a stop loss order helps simplify the task of keeping risk-reward ratios clearly defined and easy to keep track of. Even from a visual standpoint, you can see if the risk being taken is worth the potential rewards by closely examining the position of the stop loss line and the target profit line.
Trailing Stop Loss
A trailing stop loss order moves instead of staying fixed to a particular price level like how a regular stop loss order operates. The trailing stop loss will move to a predetermined amount as the position moves in your favor. The amount your stop loss will trail behind depends on how much you set, from 1 pip to 100 pips. If a position goes south right after it is opened, the trailing stop loss order does not move. Thus, a trailing stop loss order is only useful for winning positions wherein a trader would like to keep the position open for a greater payout rather than closing it outright when the position hits a certain point. Trend and momentum traders will find trailing stop loss orders a better fit for their macro strategy than a regular stop loss.
Tips When Using a Stop Loss Order
Do not expect to completely remove risk from your positions with a stop loss order. In fact, if you are not careful about picking the right price levels to put a stop loss order, you could find your positions getting wrongfully closed as price triggers the stop loss and then reverses back to where you bet it to go in the first place. When using a stop loss order from your broker, such as AlfaTrade, it’s best to widen the gap between your entry price and your stop loss price. This protects your position from occasional volatility and price spikes in either direction.
A Final Note on Stop Loss Orders
A stop loss order is a great way to minimize risk. However, it’s only as good as your ability to remain disciplined especially during unfavorable times. It’s very easy to remove a stop loss order to avoid a losing position from getting closed. Your ability to remain calm and disciplined will be the deciding factor to your success or failure as a trader.