What is Stop Loss?
Stop loss is a safety measure used by traders to prevent excessive losses - usually found with configurations in "long" or "short".
If the outcome of a trade comes out as adverse and losses are incurred, the stop loss will kick in and stop the trade at a predetermined point set by the trader.
Let's discuss the benefit of using stop loss and understand better when and how we need to apply it.
When to work with Stop Loss
While certainly not a necessity, many traders prefer to utilize Stop Loss, mainly for the following reasons:
- Small Equity Account
Most newbie traders prefer to minimize losses as much as possible while still generating occasional small profits during their first steps. The Stop Loss plays an important role in this regard by keeping the losses under the trader's control so that they can determine a set amount of risk for each target when trading; all in accord with market and revenue expectations. Most traders generally get started with a small account which doesn't really offer the opportunity to swing-trade nor can they afford to keep their postures open for weeks and even months, which is actually when Stop Loss comes in more handy.
- Stress-free Trading
The Forex Market can be a deceptive beast at times, throwing off speculators' expectations due unreliable developments and movements. Outcomes can be at times completely the opposite of what one would normally expect.
Consider a case in which a trader expects the market to go towards a bullish pattern should the fundamentals turn out to be positive, yet things do not go as expected and he has to suffer substantial cutbacks. In such a scenario, two emotions every trader should try their utmost to avoid; greed and dread, because what usually happens is they end up losing even more money while trying to recover from previous trades.
This is where Stop Loss comes in. It helps traders work in a stress-free manner in which they don't have to worry when the market takes an unexpected turn; by allowing the trader to control how much of a risk they can take and the maximum loss that they can afford to bear. Therefore, one can aim to make as much profit as they possibly can, with the amount they have invested, being aware that the situation may very well take a turn for the worse. Until the preset stop loss hits, traders don't need to worry about concluding their trade in early loss, because there is always the possibility that the market might turn around towards a favorable direction from that point onwards.
- Inactive Trading
Most newbie traders don't really spend many hours, every day in front of a screen, monitoring every market move to trade forex. It's quite impossible even for a professional trader to monitor the market 24 hours a day, every single day. So what happens in the event that a trader realizes a prospective time to trade during which he has expectations of the market going in a certain direction, yet for one reason or another he cannot monitor the market during that time? A savvy trader never misses such opportunities and always reaps the benefits of such trading sessions in which they expect the price movements to be favorable for their trading. This is where Stop Loss comes in handy yet again, allowing traders to simply key in the trade or place it in a pending order after setting up the Stop Loss in accord with their risks. In these situations, worst-case scenarios in which the market takes a turn for the worst, they do not have as much of a risk with regards to their inactive trades. The reason behind this, is that the risk never exceeds a certain point set by traders, so they are free to explore the prospects without constantly monitoring the trade itself.
In conclusion we need to stress the fact that even though stop-loss order is such a simple tool to use when trading, far too many traders rarely actually apply it. Whether one wishes to avoid excessive losses or even to lock in profits, the vast majority of trading styles may benefit from this useful tool. Consider a stop loss as being an insurance policy: one hopes they will never need it; nevertheless it's soothing just to know that one has this form of protection in the event they decide to use it.
Stop loss is a safety measure used by traders to prevent excessive losses - usually found with configurations in "long" or "short".
If the outcome of a trade comes out as adverse and losses are incurred, the stop loss will kick in and stop the trade at a predetermined point set by the trader.
Let's discuss the benefit of using stop loss and understand better when and how we need to apply it.
When to work with Stop Loss
While certainly not a necessity, many traders prefer to utilize Stop Loss, mainly for the following reasons:
- Small Equity Account
Most newbie traders prefer to minimize losses as much as possible while still generating occasional small profits during their first steps. The Stop Loss plays an important role in this regard by keeping the losses under the trader's control so that they can determine a set amount of risk for each target when trading; all in accord with market and revenue expectations. Most traders generally get started with a small account which doesn't really offer the opportunity to swing-trade nor can they afford to keep their postures open for weeks and even months, which is actually when Stop Loss comes in more handy.
- Stress-free Trading
The Forex Market can be a deceptive beast at times, throwing off speculators' expectations due unreliable developments and movements. Outcomes can be at times completely the opposite of what one would normally expect.
Consider a case in which a trader expects the market to go towards a bullish pattern should the fundamentals turn out to be positive, yet things do not go as expected and he has to suffer substantial cutbacks. In such a scenario, two emotions every trader should try their utmost to avoid; greed and dread, because what usually happens is they end up losing even more money while trying to recover from previous trades.
This is where Stop Loss comes in. It helps traders work in a stress-free manner in which they don't have to worry when the market takes an unexpected turn; by allowing the trader to control how much of a risk they can take and the maximum loss that they can afford to bear. Therefore, one can aim to make as much profit as they possibly can, with the amount they have invested, being aware that the situation may very well take a turn for the worse. Until the preset stop loss hits, traders don't need to worry about concluding their trade in early loss, because there is always the possibility that the market might turn around towards a favorable direction from that point onwards.
- Inactive Trading
Most newbie traders don't really spend many hours, every day in front of a screen, monitoring every market move to trade forex. It's quite impossible even for a professional trader to monitor the market 24 hours a day, every single day. So what happens in the event that a trader realizes a prospective time to trade during which he has expectations of the market going in a certain direction, yet for one reason or another he cannot monitor the market during that time? A savvy trader never misses such opportunities and always reaps the benefits of such trading sessions in which they expect the price movements to be favorable for their trading. This is where Stop Loss comes in handy yet again, allowing traders to simply key in the trade or place it in a pending order after setting up the Stop Loss in accord with their risks. In these situations, worst-case scenarios in which the market takes a turn for the worst, they do not have as much of a risk with regards to their inactive trades. The reason behind this, is that the risk never exceeds a certain point set by traders, so they are free to explore the prospects without constantly monitoring the trade itself.
In conclusion we need to stress the fact that even though stop-loss order is such a simple tool to use when trading, far too many traders rarely actually apply it. Whether one wishes to avoid excessive losses or even to lock in profits, the vast majority of trading styles may benefit from this useful tool. Consider a stop loss as being an insurance policy: one hopes they will never need it; nevertheless it's soothing just to know that one has this form of protection in the event they decide to use it.