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 severe losses.
It’s essential 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 can't manage to close the order (even under the condition of controlling the situation and being near the computer). In such a situation, you can not only stay without profit but also lose your money on the account. But usually, you can avoid such "surprises" if you act timely.
What is Stop Loss?
The limiting of the losses. In most cases, the limit of Stop Loss is not more than 10% of 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 the advantages of Stop Loss, many specialists do not use it. The reason for such uncertainty is the dispute regarding the possible losses. Some specialists are sure that the Stop Loss can absorb all the deposit of the trader. Other think that without Stop Loss, the 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 most cases, the Stop Loss placement is justified. To prove it, we can say, that it’s prevalent among the experienced traders. The success of the deal in most cases depends on the size of the trading instrument. You can establish the limit in 10 points and lose all deposit, or a part of it. Or you can make the order on the level of 150-200 points. You have to consider, that the placing of 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 the order is one 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 losing a more significant part of a 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
- Stop Loss has to be on the level lower than the opened position if it is a 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 sell order 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 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, the trader will get his profit. And in the case of the price reversal, the trader won't lose his profit and it will be fixed on the last Trailing Stop level.
- Stop Loss may not be used with the scalping strategy. In its case the time spent on placing may negatively influence the profit.
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.