What is the biggest worry of almost every trader, regardless of his experience or achievements? No doubt, it is the risk of losing a heavy sum of money or even all the money. It is no secret that Forex trading is a somewhat risky earning method.
Get The Full Walter Schloss Series in PDF
Get the entire 10-part series on Walter Schloss in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.
Rich Pzena Profile: In The Footsteps Of Graham And Dodd
Rich Pzena of Pzena Investment Management is doing what he loves to do. In fact, he has always had an interest in investing, just like his father. In an interview with Raul Panganiban of ValueWalk, Pzena said the financial markets were always a focus of conversation at home when he was growing up. Q 2021 Read More
In practice, this fear of tough losses is the key reason why many people hesitate whether they should try such trading at all.
But what if we tell you that there is a method to prevent (or at least minimize) losses? Have you heard of stop-loss orders? Read on to learn more about them.
The Basic Facts You Should Know About Stop-Loss Orders
A stop-loss order is an order, which is set to be sold or bought automatically when the price of a particular asset reaches the limit specified. As a result, traders can use this instrument to protect their funds from unexpected and significant price fluctuations.
In concept, this tool was developed and introduced to help traders avoid tough losses. Many participants of the Forex market treat it as a kind of insurance. It provides traders with a feeling of safety and reduces nervous tension.
Besides, many experts claim it is a great preventive measure for those who tend to make decisions based on emotions. It is hard for many beginners (and advanced traders) to stick to the strategy chosen and resolve upon selling assets at due time. Instead, they may postpone that hoping that the price will go upward and lose money in the end. In such cases, transactions, which are performed automatically, are the easiest solution.
Also, it is a valuable solution for those who do not have much time to constantly monitor prices, statistics, and forecasts or those who plan to go away for a vacation and want their money safeguarded.
Stop Loss: The Possible Strategies
A well thought-out stop loss and take profit strategy helps the trader to control profits and losses. One of the positive effects of order additions is to keep emotional factors out of trading as much as possible. Subliminally, emotions such as greed and fear influence trading behavior and especially the willingness to take risks. If a trader is faced with falling prices or possible profits, decisions are sometimes made in an emergency that would be rejected with careful consideration, but pass in the “heat of the moment”. Not always for the benefit of the trader.
Sensible order additions such as stop loss and take profit help to outsmart the “weaker self” and to ensure that the opened positions are actually closed according to the theoretically worked out limits. No ifs and buts.
In addition, the trader can use a stop loss and take profit strategy to protect himself against sudden price falls, for example in swing trades – a necessary measure in view of the speed with which global markets react to unpredictable events today.
Stop Loss And Take Profit Strategy: Where Do You Put The Stop?
The question of the best possible stop loss drives both beginners and old hands, because of course it is annoying if a stop loss is set too tight and a trade closes that immediately recovers and then books rising prices.
However, if you set your stop loss too low, you have to bear the risk of undesirably high losses before the trade can close if the price plunges. There is just as little generally valid recommendation for behavior as there is no precise forecast of the development of the markets.
In order to get a feel for the handling of stop loss, traders have to deal with the possibilities of chart analysis and of course follow market events carefully.
What Problems Can Appear With Stop Losses?
There are two situations in which stop losses will not be executed, whether they are guaranteed or not:
1) With volatility: when there is a substantial increase in volatility, stops are in great danger of not being executed. These strong spikes in volatility usually occur with important news, both positive and negative, with unforeseen events and events.
Many brokers have a warning note on their websites in which they say that they are exempt from all responsibility if an order is not executed due to increases in volatility. So forget about claiming.
2) With gaps or gaps: let’s say they are areas on the chart in which no trading has taken place so that between one candle and the next, there is a blank space on the chart. Although the reasons are usually important news, the leak of rumors, corporate operations, and low liquidity should be added for specific markets.
What Do Experts and Experienced Traders Say about this Method?
On the Web, you can find hundreds of articles and reviews about stop-loss orders. In general, there are two key positions. On the one hand, most experts believe that this tool is a must-use for every trader. But, at the same time, others claim that it is ineffective for risk prevention. More to the point, some professionals think that it is even harmful as it provokes traders to make deals at disadvantageous terms.
When there are so many opposite thoughts and declarations, it is rather hard for a trader to formulate his own opinion, especially if he is new to the sphere of Forex trading.
We should get it into our heads that it is useless to have a perfect investment methodology that usually generates good entry and exit signals if we do not have correct risk management through stop losses and protection stops. So you know that the tricky thing is not knowing how to enter the market but how to exit.
Thus, the person who wants to be a good investor, a good trader must have a series of basic and essential pillars in their operations, and one of them is risk management through the correct use of stop losses.
Its importance lies in the fact that stop-loss prevents us from losing all our capital and continuing trading.
Updated on Oct 11, 2021, 5:07 pm