Placing a stop loss is vital when trading forex or any market. And this was due to the same reasons that make the forex market profitable can make it dangerous.
Particularly, as traders trade forex, they are typically dealing with leverage and extreme volatility. And if they are not careful enough, it can result in severe financial pain.
Aside from that, many other events are not as extreme but happen more regularly.
Traders can quickly get up and walk away from the computer for a few minutes to turn around and see that some headline has crossed the wires to move the currency pair 300 pips.
In that case, they better wish that it moved in their favor. But Murphy’s Law indicates that it will never will.
The stop order is an order that becomes executable if it reached a set price and filled at the current market price. It will also command the broker to close out the position, regardless of how fast the market is moving.
Though this could end up in slippage, the order will still get filled most of the time correctly.
On the other hand, if the market moves too fast against traders, it will continue to exit the position until they are entirely flat.
Commonly, a stop order is what they call a stop loss order, meaning that it protects the account of the position goes against a trader.
Limit orders are another discussion, set at a specific price. It is only executable when the traders can execute a trade at a given price. For instance, if traders place a limit order to buy a currency at 1.1753, it will only purchase that currency at that exact price or lower if there is an opportunity to do so.
With that, it guarantees that traders don’t have to pay more than their desired price. And this is a way to enter the marketplace with precision. At the same time, it serves as a great way to save money on the trade.
The given situation continues to evolve into more complicated trades, like the stop-limit order.
Here, traders are looking at the same thing as a limit order. They may want to buy the currency at 1.1290, but they placed a limit price of 1.1300 too. In case the currency’s price moves above the 1.1290 stop price, it will activate the order and turn into a limit order.
As long as the order can become filled under the 1.1300 level, the trade will fill. As a result, it protects people from gaps and poor slippage.
Nevertheless, not all forex brokerages offer this order type. Still, this may be something traders might want to look for when picking a new broker.
Trade with Them
Forex markets are indeed very risky if not adequately protected. Now, using the stop loss and limit orders mentioned can help protect assets. However, some people can’t accept losses, leading to choose to forgo the orders.
Some professional traders will then use options as a type of stop loss, but that is a much more complex strategy. So, traders must focus on the time trade has proven their thesis incorrect.