Many traders would agree that trading on the foreign exchange market could be likened to riding a roller coaster. Prices change so violently, in unpredictable movements, which will stir you up if you’re not well prepared. But it can be enjoyable, if you learn how to appreciate the ride. In Forex markets, you either win big or you lose big. To avoid the anxiety that comes with the fear of losing on a trade, it is important to master when and how to cut your losses.
No matter what type of trader you are and what kind of system you use, a clear plan on cutting losses should always be part of your arsenal. By understanding what makes a good stop loss strategy, you can plan better trades and have the chance to exit easily whenever the tide goes against your favor. Read on and learn how to use stop loss in Forex trading effectively in your trades.
Stops are important because they signal you when it’s finally time to quit and move on to another trade. Knowing that they automatically place a sell order for you once a currency’s value reaches a certain price, it allows you to fall asleep much better. The stop loss can be considered an art because there really is no golden figure when it comes to setting one. The amount of risk traders are willing to assume mainly determines the level where they set their stop orders; however, using this indicator alone is not enough as it does not look at the bigger picture.
A common mistake traders commit when setting stops is that they only consider how much they want to lose, depending on the size of their position. Don’t ever assume that a stop at 1-3% is a safe way to go. Depending on the currency pairs you are trading, daily price movement may experience changes beyond 3%, which puts you at a quick loss already.
Given this illustration, you have to make sure to account for volatility in price movements in developing your stop loss strategy. Be sure to use stop loss in Forex trading strategically. For both short and long-term traders, the keys to setting effective stops lie in limiting risk to manageable levels and protecting your position from volatile market fluctuations.
Now that you have a good idea of an effective use of the stop loss, be sure to take full advantage of it since it won’t even cost you a dime to execute. Break free from the anxiety and stress as using the stop loss effectively removes the need to check prices frequently and will help keep your mind off the market. Having a stop-loss strategy not only helps you limit your losses, but it can also be useful in maximizing profits. If one of your positions has been going up quite a while, a stop-loss that ‘trails’ your position as it grows allows you to lock profits while you continue to hold that position.
A trailing stop loss serves to protect your unrealized gains, until the price finally drops. Remember that only two things can happen when you trade Forex, stocks, or any other financial market as a matter of fact. You either gain on a trade, or you lose on it. Knowing the maximum amount of money you can lose beforehand can put you into a mindset that allows you to make better, more rational trades. Once you learn how to use stop loss in Forex trading, you’ll become a good trader in no time.