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Understanding Stop Losses in Forex Trading
Written by: PaxForex analytics dept - Friday, 12 May 2017 0 comments
Many traders do not fully understand when it is safe to enter a trade, so they often get into the market at the wrong time, and a stop loss is used to limit their losses if the trade moves against them. A great deal of trading education and material that is shared with learning traders focuses on finding the right places to enter trades. The entry is very important, but good trade management – i.e. using the right stop losses and take profit levels and changing these levels appropriately as the trade progresses is equally important.
A stop loss is a type of order which will automatically close a trade at a set level in order to prevent further losses. If a buy order has been placed, then the stop level is set at a price that is lower than the buying price. On the other hand, if a sell order was triggered, then the stop will be placed above the selling price. Stop loss orders not only allow you step away from your computer without worrying about your trade, but they also have a psychological effect in the sense that they are much more effective in forcing you to limit your losses than closing your trades manually.
The management of your stop-losses is basic training for a new forex trader who desires
to become a successful one. This is the order that you place that will close out your trading position once it reaches the maximum amount of money, or pips, you are willing to lose. Your personal trading strategy and plan for that trade should dictate when you pull out in order to minimize your losses and maximize your gains.
Every trade comes with a certain amount of risk and since there is no clear way of knowing future prices, despite the amount of information available, you need to have a clear-cut limit on how much you are willing to lose. Traders make good deals most of the time, where they make mistakes is with their loss management. If you are losing more than half of what you are gaining, then you are going to deplete your account before you ever see any real gains.
Every trade is basically a business deal. It is essential to weigh the risk and the reward from the deal and decide whether it is worth taking or not. In forex trading, you should consider the risk of the trade, as well as the potential reward, and if it's realistically practical to obtain it according to the surrounding market structure. To trade more profitably, it is a prudent decision to use stop-loss and take-profit in forex.