A lot of forex traders do not fully understand how to use a stop loss order properly and think it is only to exit a trading position at a loss. This is a very big mistake new trader’s make. Successful and professional forex traders never use a stop loss order to close a position at a loss, but rather to exit a position at a profit before price action reverses.
Professional traders usually don’t use a stop loss order in order to exit a trade at a loss, only new and inexperienced traders do so. Professional traders hedge their positions and then trade out of them; never is a stop loss order used for closing an open trade at a loss. The only instance where professional traders do use a stop loss is in order to secure profits.
This may sound very confusing to new traders, but it is very important for new traders to learn the proper use of stop loss orders so they can advance their trading. This approach may not be popular, but success as a forex trader is rare so it is good advice to follow the unpopular approach.
Would you rather use a stop loss to close a trade at a loss or exit a trade at a profit?
The answer to every trader is obvious. Before we go into a mathematical example of how a stop loss order is used by professional traders, let’s mention what is required in order to align your forex portfolio to use a stop loss order to secure profits:
- A good forex trading strategy is the vital starting point
- Solid risk management
- Understanding of how the forex market functions
- Ability to read and understand charts properly
- Discipline and patience
The above five need to be present in order to advance to the next step of your trading career. Once you have all five in place you can crossover from new trader to smart and sophisticated trader which means you will use a stop loss order for closing a trade at a profit and not like all new traders to close positions at a loss.
Here is an example
Let’s say you have opened a short position in the EURUSD currency pair at 1.3425. This currency pair starts to correct as you analyzed and currently trades at 1.3300. You will have a floating trading profit of 125 pips. You will now set your stop loss to 1.3350 (or any level you prefer) in order to realize at least 75 pips in profits.
Should this currency pair reverse and rally you will have realized 75 pips in profits, should it continue to correct you will keep moving your stop loss order lower in order to ensure more profits which will be guaranteed to you. That is how you use a stop loss order in a professional manner.