What is a Stop Loss?

A stop loss is an offsetting order which exits your trade if a certain price level is reached to protect you from further losses in case a trade goes against you.

At any one point 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 un predictable 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 if you want to be good forex trader, 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.

When you think about how much you can lose in a trade before thinking of profits, you will be able to understand and accept that losses are part of trading.  When understand this, you will be able to plan on how you can reduce or minimize them as you increase your chances of maximizing your profits.

You can have a very excellent strategy but if you don’t do proper risk management you may not be able to 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.

A stop loss defines how much you are willing to lose on your account and that should not make significant influence on your life or relations. Check 2% risk rule.

It should be set a few pips from your entry level either up or down depending on the kind of trade you are taking.

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

Your stop loss should not be too wide or too tight but should be adjusted according to your position size.

Losing a trade while trading is very ok, but what matters is how much you have lost.  How big is your drawdown?

Forex markets can sometimes put up a show seducing you by putting up perfect-like signals. But a tweet from Mr President Trump can disorganize the market and in a second you are just knocked out if hadn’t set you stop losses.

The market is very sensitive with almost qua-trillion ears that no rumor can escape it. Just 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, this is why stop losses are your shield from all these uncertanities.

You may escape for some time without setting stops.  But one day your ten years hard work can be blown just in a second and you have no room to console your broken heart.

A stop loss is a trade management skill that is provided on your trading platform in the trader’s tool box.

It helps you exit a trade when you are wrong about the market so that you are able to 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.

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

When this happens, don’t try to fight with the market. Take your time and try to analyse your failed trade and find out where you could have gone wrong as you wait on other new market opportunities.

Let’s now go to the interesting part! How to set stops.

 

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