Everyone desires to keep the wins and avoid the losses in forex trading. Stop-loss orders are an effective way to stop losses, especially for beginner traders. So let’s discuss what stop-loss orders are in Forex.
In forex trading, a stop-loss order is popularly known as the type of order designed to limit losses. Alternatively, a stop market order is also known as a ‘stop order.’
A trade will be closed at a loss if this order is executed. As such, it is a directive to execute a trade by a trader’s broker or trading company when a given price level is below the trader’s entry price.
While no forex trader wants to lose a trade, some losses are inevitable in trading, so it is better to reduce risks and keep losses as small as possible.
How does a stop order work?
Stop-loss orders are called ‘stop orders,’ so you must know what they are. Stop orders execute differently than other order types, such as limit orders, used for profit orders.
Consider the following example: You buy GBP/USD at 1.3110 and set a stop loss at 1.3100. However, your stop will not be fully triggered at 1.3100 if nobody seeks to accept your final sell order at 1.3100 – perhaps due to the economic news release.
Stop loss: Is it a good idea?
If a trade turns sour, the best forex traders determine where they will sell the currency pair. Likewise, if they are short a forex pair, they know where to buy it back at a loss.
A stop-loss is automating, making sure the trade is closed as planned. Limit orders that ensure a winning trade is exited on schedule can be compared to ‘take profit’ orders.
Through the stop-loss order, you already know that you are having an order sitting there, ready to cut all your losses, without having to monitor the movement of price constantly. New traders tend to start as part-time traders, which is especially helpful.
How can you set a stop loss in forex trading?
One of the most important questions new traders have is placing the stop-loss order. Risk management, as well as position sizing, determines the size of your complete stop loss. Using a stop-loss strategy is the key to looking for the best trading system.
Decide the actual price for indicating if the trade idea is correct or wrong – Set the stop-loss order (SL) here.
Put a take-profit (TP) order here. Then, if you are right about the price level, the market will move to if you were right.
It’s the difference between your entry and stop-loss that determines the number of pips you’re risking.
You should select a trade size that involves a maximum risk of 2% of your account. For example, you can trade five lots with a stop loss of almost 50 pips and a risk of $500.
Stop-loss orders hence serve primarily one major purpose. It reduces risk exposure by limiting the potential losses. In short, for reducing the risk and avoiding catastrophic loss, traders are strongly encouraged to utilize the stop-loss orders whenever they enter a trade.
The purpose of stop-loss orders is to reduce the risk of trading by limiting the amount of capital exposed to each trade.
Tehcnical Points references: https://www.fxcc.com/how-to-set-stop-loss-and-take-profit-in-forex , https://www.thebalance.com/understanding-andy-applying-stop-losses-in-fx-trading-1344899