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Understanding Forex Stop Losses And Trailing Stops
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Understanding Forex Stop Losses And Trailing Stops

There are many different types of orders that traders can utilize and combine with their trading tools and strategies – especially “risk management” strategies. The two most popular orders that can assist in

risk management are “Stop Loss/Limit” orders and “Entry Limit/Stop” orders. A “stop loss” order stops your loss from getting any worse than it already is by closing your open position at the level that you set.

And an “Entry” order gets you into the market at the price you require. If there is anything we hope you remember and use, it is this one message. Your primary goal, as a new Forex trader, is to avoid losing large amounts of money. It’s perfectly normal for an experienced trader to make occasional small losses... this is a good system performing correctly. To avoid making large losses, please protect all your orders with a correctly placed “stop loss”.

What are Stop Loss Orders in Forex

Traders should ALWAYS place trades with a “stop loss” order. This is the price where your position will automatically close should the market move against the trade. Your “stop loss” is your protection against a “worst case” scenario. In other words, it allows you to minimize your risk to a massive loss. If you view this as your “worst case” you will understand why you must always place a “stop loss” order. Let’s say you are placing a trade that is costing you $1,000. The reality is that you will lose money on some trades, for not every trade can be a winner. So, when you place this $1,000 trade, you should decide the maximum amount you are prepared to lose before deciding that the trade is not going your way and exiting. Let’s assume that you’re down to $200 and decide to exit if the trade moves against you (that is, when your position is worth $800). This situation illustrates the usefulness of a “stop loss” order—or, more aptly, a “get the heck out of this trade” order. Various risk strategies provide guidance on how much you should risk based on your account size. We will explore these later.

Now, you may be wondering why you should place a “stop loss” order when you can, in the event that the market moves against you, manually get out of your trade. Sadly, many traders have found themselves blowing through their trading accounts using this strategy. For one, you may not be glued to your PC (you may be at lunch) when the ever-changing market moves rapidly and wipes out 50% of your trading account. Trust me-- this appens. The other major reason for using “stop loss” has to do with the emotions that come into play when trading live.

Believe me it takes an incredible amount of discipline to close out a losing order, because always want to wait just another minute to see if the trade turns around. Slowly, your account is totally wiped out. By going in with a predetermined “stop loss,” you limit your risk and remove the emotion. When a “stop loss” is triggered, you have lost a little, but u still have funds in your account and you get to fight another day. To get acquainted with stop loss trading, trade forex with ForexCT which allows different types of executions including market order, limit orders with the ability to set up stop losses on your trade. Do not follow a trade all the way to zero your account balance.

We will talk more extensively about forex money management later, but for now remember this: always place “stop loss” orders at the same time you enter you trade in an intuitively good place. And learn to love your regular small losses, as they are an indication that your trading system is working properly. Any large loss is the indication that your psychology and or your trading system is not working well enough. The two types of “stop loss” orders are “sell stops” and “buy stops”. “Sell stops” are used to exit a long position while “buy stops” are used to exit a short position. Stop losses form an important aspect when it comes to implementing forex trading strategies. Usually, “stop losses” are triggered at the order price; however, should the market gap over the stop, the position will be closed at the next best available price on offer.

What is Trailing Stop in Forex

A Trailing Stop is a fantastic method to capture profits should there be a significant correction or a change in trend in the market. We already spoke about stop losses--the point where your trade is automatically closed out. The beauty of a “trailing stop” is that if the prices continue to move in the direction of your open position, the “trailing stop” will follow the prices (it “trails” by an amount that you set).

This allows you to lock in more profit. When the prices finally do reverse the trailing stop will not reverse, and the prices will hit your “trailing stop” and close out your position. The “trailing stop” follows the market prices at a predetermined pip distance that you set. Remember not to have the trailing stop too close, for you could be unnecessarily stopped out by natural market fluctuations.

Traders new to Forex should ALWAYS enter a trade with a “stop loss” order. This is the price where your position will be automatically closed should the market move against your open trade. These are just few of the factors, besides choosing a right forex broker that will help determine your success in forex trading.


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