Stop Loss Basics

Managing stop orders may prove the trickiest thing you have to do in Forex trading. Stop loss orders are those orders which close out the trading position that you currently have when the market starts to move against you, in order to cut your losses.

There are clear rules about when to place stop orders. It is up to you and your trading strategy.

In case you have a day trading style, the stop order may be placed right outside the daily range of your trading currency pair. In case the trend of the market suddenly moves to the opposite direction of your trading, then you are safe, as the position is closed and your account protected.

If you have a more swing style in trading, then your stop order may be placed outside a range between twice and three times more than the daily range.

What the stop loss does is ending the trade at the point in which the market goes to the opposite direction and makes your trade senseless, causing loss to your account. This, of course, implies the risk of making the wrong decision. However, considering how unpredictable the markets are, it is better to have a safety net at any time. You may find yourself in the position of being certain of an obvious trend and be taken by surprise by an unexpected turn of the market. It is advisable to draw your protection line right from the moment you enter a trade and set the stop loss.

The stop loss shouldn’t, however, be moved further out, so that the trade doesn’t get stopped out, no matter your strategy for stop loss. Of course, just like any rule, there are exceptions. Still, if your stop loss order is hit on a good trade, this means you haven’t placed them correctly from the start. This is the point when you should modify the stop loss strategy. You shouldn’t move the stop loss so you avoid having that point hit, because you would only cancel its protective purpose.

Before setting your strategy for stop loss orders, think about your trading style and how your account looks like and make the strategy based on this information. Your objective is to reduce losses in case your trading goes wrong. If you still loose too much or the stop loss point you have set are getting hit constantly, then it means you should rething your system.

Stop orders and stop losses

A stop order (stop limit order, for example) and a stop loss are not one and the same, but they do go used together. However, they don’te replace one antoher.

The stop loss is the order used by traders to exit the trade when it reaches a maximum loss accepted by the trader. A stop order, on the other hand, is a type of order which allows traders to exit or enter a trade in some specific manner. For instance, you may want for the price to keep on moving and keep the same direction after having made the trade.

Stop losses use stop orders , such as stop market orders. The stop order is the kind of order which works as stop loss in the right way. For instance, when the market reaches the price fixed by the stop loss, it is processed and filled. For instance, if the trade for British Pound to the US Dollar on the currency market is set at  1.6705, the stop loss may be set at  1.6689 through a stop market type of order. This is filled when the market reaches  1.6689 in trading, or less.

Sometimes you may hear traders saying that they made a trade at  500.50 and the stop was at  480.50. That is a mistake, because there ins’t anything such as stop in forex market. What they meant was that they set a stop loss order, but mistakenly shorten to a stop. This means that those traders don’t understand or simply don’t know the difference between stop orders and stop losses. The fact that a trader uses stop instead of stop loss doesn’t prove that he is an experienced trader, familiar with the trading terms, but on the contrary, that the trader is very superficial and doesn’t make much money.