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 the serious losses.
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It’s very important 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 just can't manage to close the order (even under the
condition of controlling the situation and being near the computer). In
such situation, you can not only stay without profit, but also loose
your money on the account. But usually you are able to avoid such
“surprises” if you act timely.
So, what is Stop Loss?
The limiting of the losses. In the most of cases, the limit of Stop Loss
is not more than 10% from 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 advantages of the Stop Loss, many specialists do not use it.
The reason of such uncertainty is the dispute regarding the possible
losses. Some specialist are sure that all the deposit of the trader can
be absorbed by the Stop Loss. Other think that without Stop Loss, 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 the most cases, Stop Loss placing is
justified. To prove it, we can say, that it’s very popular amount the
experienced traders. The success of the deal in most of cases depends on
the size of the trading instrument. You can establish the limit in 10
points and to lose all deposit, or its part. Or you can make the order
on the level of 150-200 points. You have to consider, that the placing
if Stop Loss has to depend on the volume of the deposit and the chosen
lot.
Imagine the ordinary situation: trader has about USD 1000 on the
account. While the volume of order is 1 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 loosing bigger part of 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.
So, what are the rules of Stop Loss placing?
Basic recommendations:
- Stop Loss has to be on the level lower than the opened position, if
it is 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 order
sell 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 of 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, trader will get his profit. And in the case of the
price reversal, trader won't loose his profit and it will be fixed on
the last Trailing Stop level.
- Stop Loss may not be used with the Scalping strategy. Since in this
case, the time, spent on placing, may influence on the profit in the
negative way.
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.