What is Stop Loss in Forex Trading?
What is Stop Loss in Forex Trading
What is Stop Loss in Forex Trading? Generally, when a Forex trader begins to understand the concept and the processes of trading, he/she starts to find an ideal system of trading for getting in positions. As soon as he/she finds an ideal trading system, the importance of risk management and trade management becomes less to him/her. This is when the importance of Forex stop loss can be understood. In simple terms, stop loss is designed basically to limit the loss of an investor on one position.
This article will discuss Forex stop loss and its importance in detail.
Importance of Stop Loss
Stop Loss in Forex Trading
In most cases, if the trades move in a favorable direction, a trader makes money and all the other aspects seem irrelevant. A trader usually tries to find out an ideal system, which will work favorably & that’s when the trader discovers that he/she can figure out everything else as he/she goes along.
The above description is the common perception of an ideal trading. However, this is unrealistic. There is actually no Forex trading system, which will guarantee a win every time or at least ninety-nine percent of the time. Therefore, without trade management, money, and risk, the majority of the traders will not be able to attain their objectives & fulfill their ambitions or aspirations until and unless they decide to make few radical modifications to their previous approach.
A trader should practice risk management that will make sure that the losses are kept minimal in case he/she ends up taking a bad decision. Similarly, when the trader will take a wise decision, the profit will also be maximum. However, practicing risk management is more important than just realizing that it should be practiced. For this reason, this article was prepared, to explain the meaning and importance of stop loss.
What is Stop Loss?
Stop Loss in Forex Trading
A stop loss is actually an order that is placed with the broker of a trader to sell one security when the security reaches a certain and specific price. Further, a stop loss is specially designed to ease up the loss of an investor on one position in one security. Although the majority of the traders associate stop loss orders with one long position, stop loss can also be applied for one short position as well. A stop loss order helps in eliminating emotions, which can impact the decisions of a trading. The stop loss can come handy, especially when traders are unable to keep an eye on the position.
Stop loss in FX is critical for many reasons, but the main reason, which overshadows the rest, is that everyone cannot predict the Forex market’s exact future. The future prices are not known & every trade that enters the market is risky, and it doesn’t matter how strong a setup is or how reliable the information might sound to a trader.
Forex traders may win most of the time with the majority of the common or usual pairings but if the money management is not good, then they may still lose money. Unpleasant consequences are often the result of improper money management. In order to prevent this, a trader should have a clear understanding of stop loss in Forex.
Stop Loss: Static Stops
Stops can be established by the Forex traders with an expectation that until the trade hits the limit price or stop, there will be no changing or moving the stop, or the allocation of the stop. The stop mechanism’s ease is due to its ability and simplicity for traders to specify their need of having a minimum one-is-to-one risk to the reward ration.
Stop Loss: Trailing Stops
Trailing stops can be considered as the stops, which are adjusted as trade moves, in the favor of the trader, to help in diminishing the risk of a trader being wrong in one trade.
This article mainly addresses the question; what Is Stop Loss? It is not very difficult to understand the importance of stop loss. The majority of the traders understand the need and importance to place the stops.
Moreover, the movements of the market can be pretty unpredictable at times and a stop loss is a very important tool that Forex traders can use in order to prevent one single trade or few trades from destroying or ruining their careers. A trader should be capable of identifying and distinguishing situations where to set one stop loss in all his/her future trades.