To every experienced Forex trader, stop loss is part of their trading strategy. To many who are new in Forex trading, you might not know what stop-loss is. Why is it important? You might even ask should I trade with or without stop-loss.
What is Stop-Loss?
A stop-loss is an order that closes out your existing trade in order to limit losses.
Stop-losses are literally used to stop the loss of your trading capital. When your stop loss order is hit on a trade, the trade is closed at the current market value.
Why is it important?
If you did not place a stop-loss order, you can face with huge losses and your account will be wipe out in no time. I encounter this situation when I started out. I kept topping up funds into my account. So, I started to understand what stop-loss is and began to make use of it. Till today, I do not have to top up my account anymore.
Stop-loss helps to protect your trading capital. You will not always be right with your trade even the trading signals have indicated. As we know markets are unpredictable as the weather, there can be times when the market moves against you. So, with stop-loss order, it ends your trade and relieves you from holding the losing trade with emotion.
What are the rules for placing stop-loss order?
There is no clear rule of thumb when it comes to placing stops, it all depends on your trading strategy and risk tolerance. Some traders may decide that they are willing to incur a 30- or 40-pip loss on their position, while other, more risk averse traders may limit themselves to only a 10-pip loss.
From one article I read, it said that if your trading strategy is more like a day-trading style, you might want to place a stop just outside of the daily range of the currency pair that you are trading. This way, if the market suddenly breaks the trend that you are trading and moves far enough in the opposite direction, your account is protected because your position is closed.
No matter what stop-loss strategy you choose, remember not to move your stop-loss further out to prevent the trade from being stopped out. By moving your stop-loss to avoid being hit, you are defeating the protective purpose of it.
Another tips is do not make your stop-loss too tight. If the stop-loss orders is too tight, they will be constantly filled due to market volatility. Stop-loss orders should be placed at levels that allow for the price to rebound in a profitable direction while still providing protection from excessive loss.
When coming up with your stop-loss strategy, just remember to set stops that make sense for your account and trading style. The whole point is to limit your losses when you are wrong. If your losses continue to be excessive or your stops are constantly hit, you may need to rethink your strategy.
So, with or without stop-loss?
There are traders who do not use stop-loss because they think that stop-loss limits their profits. Some traders using locking, hedging and averaging as mean of cutting loss. And there are some who cut loss on the fly.
Traders who use stop-loss, are those who are new to Forex trading. Another reason for using stop-loss is when you trade on longer time-frames and you don’t want to stare at the charts for hours and stop-loss works as safety catch.
In conclusion, it all comes back to individual choice base on their experience, risk tolerance, and trading strategy. For me, I will still use stop-loss as this will eliminate the necessity to make emotional decisions and to limit my losses.
What do you think, to trade with or without stop-loss? I would like to hear from you. Place your comment below.