A good stop loss can be a true saviour. During Forex training, this should be one of the most important subjects covered along with where to enter and exit trades. A stop loss is literally a price point that defines that a trade is wrong. That is, if a trade is placed into the wrong direction, a stop loss will take the order out of the market once prices reverse back too far. This is why it is so important to use it.
There are number of traders who trade without a stop loss. Whilst they might be professionals, chances are that at some point the market reversed just a little too far at which point the order had to be closed manually. This is a very risky way of trading. The reason is that markets can be very unpredictable. A sudden spike in price that is not stopped by an automatic stop loss could result in high losses. Human reaction may not be quick enough.
One of the most commonly asked questions is – “Where do I put my stop loss”? If it is placed too far the loss may be too large as it gives price too much room to move around. If it is placed too close, it may be triggered too early as there is no room to move around. The answer to this is dependent on the Forex trading strategy used by the trader. A number of these are taught throughout Forex training and some are adapted the more screen time traders clock up. The most common place to put a stop loss is just a few pips behind the last swing. However, it is crucial that the strategy has a target that is at least double the distance that of the stop loss. This makes the win/loss ratio 2:1. This means that one win can cover two losses so even with a 50% hit rate, the long-term result is profit.
Ability to place a stop loss is a basic feature provided by all Forex brokers. They can be placed in a pending order which is triggered once prices reach a specific point or they can be inserted soon after a market order is complete. It is more important to get the order into the market first; only after this should a stop loss be placed.
Most Forex brokers included a field/tab where the stop loss price point is placed, whether the trade is going long or short. It can also be amended pending the success of the trade. By all means, they can be moved in the direction of the trade once the trade is in profit but under no circumstances should it be moved further away once prices start reversing towards it i.e. when the trade is wrong.
Most Forex brokers are competent enough to take the order out of the market as soon as the stop loss price point is reached. However, some have very bad servers that create a lag. This means that it may take a few seconds for the order to be stopped. If this is the case, then a new broker should be considered.