What is a Stop Loss?

A stop loss in forex trading is one of the major risk management tool you need to master before you start trading.

With a stop loss on a position, you intend to reduce the amount of loss on the trade.

Also, it tell you how much you are likely to loss on your account in case a trade goes against you.

In other wards, a stop loss is an order which exits your trade if a certain price level is reached.

  It protects you from further losses in case a trade goes against you.

At any time, the market can move in any direction. There is no one or any trading system that can predict the market 100%.

The Forex market is very unpredictable and no one should feel that they can completely understand or influence the market.

Let it be the big market makers they are never 100% right about the movement of prices in the market.

This means, you should first think about how much you can lose on a wrong trade before thinking of what you can make out of the market.

Once you understand that, you will eventually accept that losses are part of trading. It helps you to plan on how you can reduce or minimize your losses at the same time maximize your profits.

You may have a very excellent strategy,which is okay. However, if you don’t do proper risk management you will not stay in the game long enough to see the rewards of your system.

One sure way of minimizing losses is by setting a stop loss for every trade you take.

How do you set a stop loss

A stop loss in forex trading defines how much you are willing to lose on your account.

Your loss should not make significant influence on your life or relations. Check 2% risk rule.

You can set your stop loss a few pips from your entry level either up or down. This depends on the direction of the trade.

If you take a buy/long position, put stop loss a few  pips below your entry price.

Conversely, in case of a short/sell position, set stop loss a few pips above entry price.

The chart below shows an example of a stop loss on a short position.

When trading patterns, it is easy to set stops because you follow the measurements of the pattern. This is not completely different from other trading systems.

If you know how much you want to risk per trade then you can measure your stop loss in pips.

Never the less, some factors such as price Volatility must be put in consideration when setting stops.

You should set a stop loss that is not too wide or too tight but enough match your position size.

Losing a trade is very okay, but what matters is how much you have lost.  How big is your draw down?

Why should you trade with a stop loss in forex?

Forex markets can sometimes put up a show putting up perfect-like signals.

Just a single tweet from US President Trump can disorganize the market in a second.

With your perfect signal, you end up carrying your hands with frustration.

The market is very sensitive with almost qua-trillion ears that no rumor can escape it.

Anything from global politics, major economic events, Central bank decisions and any kind of crisis or event, can make currency prices faster and more volatile than you can blink.

This completely guarantees inevitable losses. Now you see why stop losses are your shield from all these uncertainties.

You may escape for some time without setting stops.  But one day your ten years of hard work can be blown just in a second. It may be too late to recover from a broken heart.

A stop loss  helps you exit a trade when you are wrong about the market so that you can plan ahead for other coming opportunities.

With a stop loss your body is less susceptible to pressure due to stress and fear, therefore you can easily make good trading decisions.

Also, when your stop loss is hit, your trade automatically closes out and you are out of the market with acceptable loss.

In this case, don’t try to fight with the market.

Take your time and try to find out where you could have gone wrong as you wait on other new market opportunities.

 

 

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