If you’re considering taking up Forex trading, either as a hobby or as a full-time occupation, you have probably read more than one article about the value of stop losses. But do you really need to use them in your trading? We discuss that question in this post.
What Is a Stop Loss?
A stop loss order is a dollar amount you set in your trading tools. This order triggers the sale of a particular stock when the price of that stock reaches the point you have set. Its purpose is to minimize your trading losses. Nearly every successful Forex trader will tell you to use this tool. This is because your trading will be more profitable over time if you do.
But it’s important to remember that stop losses are only a tool. Like every tool, they work only so well as the strategies you use to implement them. In other words, you can develop a level of skill with using them, then most of the time you can use them to your advantage.
A Stop Loss Can Work Against You
However, there are times when—at least to all outward appearances—your stop loss orders will not be in your best interest.
For example, let’s say you decide to make a move on a particular stock when it’s heading upward in price. Once it’s yours, it continues moving up, and you allow yourself to feel the thrill of victory.
But then, unexpectedly, possibly because of some world event, it begins moving downward again, perhaps even plummeting.
When it reaches your stop loss point, the automated tools in your Forex trading apps trigger a sale. Just as you are about to congratulate yourself because your order prevented too much hemorrhaging, the stock price bounces back up again.
You end up bemoaning the fact that if you had not set your order at that particular point, you might have chosen to hold on for a while. You might even have eventually earned a profit.
They Usually Work the Other Way Around, Though
Most of the time, however, a stop loss order will work to your benefit. This is because stock prices don’t usually bounce back up immediately once they have begun a downward trend.
Therefore, over time, well-set stop loss orders can save Forex traders anxiety as well as lost profit.
Develop an Effective Strategy for Setting Stop Losses
If in your Forex trading you’re losing more than you think you should because of your stop loss orders, perhaps it’s time to study up on how to set a more effective strategy with them.
When a particular stop loss strategy isn’t working, it’s usually because the trader doesn’t stop to think things through before they set their orders.
So every time you set one of these points, consider the state of the market. Study the many technical tools you have at your fingertips. Also consider world events that could at some point affect the price of the stock you have in mind.
Set your stop loss orders carefully and with much forethought, and they will work better for you in the long run.