Here we explain what a stop loss order is & how to place a stop loss order.
We explain the key reasons why a trader must place stop-loss orders with every trade & explain what outcome the trader could experience of he fails to use stop -loss orders in his strategy.
A stop-loss order is a type of order that is placed with a broker to buy or sell a currency pair (or any other financial instrument) when the market reaches a certain price.
The purpose of a stop-loss order is to limit the amount of loss that a trader can incur on a trade by automatically closing the trade when the market reaches a certain level.
The key point is that by setting an automatic stop-loss the trader removes the responsibility to close the trade from him or herself.
This is important because many traders cannot trust themselves to close the trade when it starts moving in to a loss. Too many traders hold on for too long in the hope that prices will reverse to reduce the loss or turn the losing trade in to a winning trade.
‘Trading-on-hope’ is never a good strategy!
To place a stop-loss order, a trader would specify the currency pair they are trading, the amount they are willing to risk, and the price at which they want the stop-loss order to trigger.
For example, a trader might place a stop-loss order to sell EUR/USD at 1.2000, if the trade goes against them.
There are several key reasons why a trader should use stop-loss orders with every trade:
- Risk management: Stop-loss orders help to limit the amount of loss that a trader can incur on a trade, which is an important aspect of risk management.
- Emotion control: Stop-loss orders can help to prevent a trader from letting emotions such as fear or greed influence their trading decisions.
- Consistency: Using stop-loss orders can help a trader to maintain consistency in their trading by automatically closing a trade when the market reaches a certain level.
If a trader fails to use stop-loss orders in their strategy, they could experience several negative outcomes:
- Large losses: Without a stop-loss order, a trader could suffer large losses on a trade if the market moves against them.
- Lack of consistency: Without stop-loss orders, a trader’s trades could be inconsistent, as they may not have a clear plan for when to close a trade.
- Emotional trading: Without stop-loss orders, a trader may be more likely to let emotions such as fear or greed influence their trading decisions.If you are trading without using stop loss orders you are not trading, you are gambling because you have no idea what your downside risk is. Therefore you are not controlling your risk vs your potential reward.
Understanding risk vs reward is a key aspect for successful traders.
Overall, stop-loss orders are an essential tool for risk management in forex trading. A trader should always use stop-loss orders with every trade to limit their potential losses and maintain consistency in their trading.
It’s important to note that stop-loss order does not guarantee profits and it’s just a way of managing the risk.