Stop loss on Forex – what is it?

Trading on Forex is a range of activities. Each trader should be able not just to know how to calculate the profit, but to learn to stop on time, close the order and finish the trading. The minute of delay often can cause the serious losses.

It’s very important to be near the computer to control the process of trading (at least, while the order is open). Sometimes it’s not possible to do. In such cases it’s better to use the pending order, such as stop loss or take profit order. Don’t forget about gaps – the situation when you just can't manage to close the order (even under the condition of controlling the situation and being near the computer). In such situation, you can not only stay without profit, but also loose your money on the account. But usually you are able to avoid such "surprises" if you act timely.

What is Stop Loss?

The limiting of the losses. In the most of cases, the limit of Stop Loss is not more than 10% from the size of the margin per order. If the company is oriented on the newbies, then the limit may be up to 15-20%. Thus, the main task for this order is to reduce the losses of the trader.

Despite all advantages of the Stop Loss, many specialists do not use it. The reason of such uncertainty is the dispute regarding the possible losses. Some specialist are sure that all the deposit of the trader can be absorbed by the Stop Loss. Other think that without Stop Loss, trend is usually not unfolding and the price is "killing" the deposit. It’s worth to note, that in the first case you can avoid the losses, if you wait till the price returns to the previous level. Opinions are different, as well as the result of the trading.

Anyway, we can’t cast aside any point of view. You can work with Stop Loss, as well as without it. But in the most cases, Stop Loss placing is justified. To prove it, we can say, that it’s very popular amount the experienced traders. The success of the deal in most of cases depends on the size of the trading instrument. You can establish the limit in 10 points and to lose all deposit, or its part. Or you can make the order on the level of 150-200 points. You have to consider, that the placing if Stop Loss has to depend on the volume of the deposit and the chosen lot.

Imagine the ordinary situation: trader has about 1000 USD on the account. While the volume of order is 1 lot, Stop Loss is set on 50 points and Take Profit is set on 100 points, it is possible to tell with high probability about loosing bigger part of deposit. If the Stop Loss is placed on the level of 300 points on the highest and lowest level of the prices in the weekly chart, then the profit can be increased considerably. Wherein, the chance of the order closing at Stop Loss is minimal.

How to Use Stop Loss

Basic recommendations:
  • Stop Loss has to be on the level lower than the opened position, if it is buy order. The goal is the same – to minimize the probability of the losses and increase the probability of saving the deposit in case of the sharp reducing of the quotations.
  • Stop Loss has to exceed the level of the opened order, if the order sell is opened. In this case, the losses will be minimal, if the prices increase. There are some traders, who are trying to move the Stop Loss, on the expectation of the price turning. It’s not the best idea, because in 50% of cases it causes higher losses.
  • Using of the special case of the Stop Loss – Trailing Stop. This function helps to move the borders of the Stop Loss after the market movements. The border automatically shifts, when the market passes more than 15 points in the desired direction. Wherein, if the Trailing Stop works at least once, trader will get his profit. And in the case of the price reversal, trader won't loose his profit and it will be fixed on the last Trailing Stop level.
  • Stop Loss may not be used with the Scalping strategy. Since in this case, the time, spent on placing, may influence on the profit in the negative way.

In any case, we need to use Stop Loss, since only with the help of this instrument it becomes possible to secure our deposit. Naturally, you have to know how to use it, otherwise the effect may be the opposite.