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What is a stop-loss in Forex trading?
What is a stop-loss in Forex trading?

Every experienced trader understands that it is simply impossible to prevent financial losses if you trade in the financial market. The trader's task is to make sure that the income from winning trades is greater than the losses from losing ones. Besides, there are various tools to cut losses. In particular, every beginner needs to understand what a stop-loss in Forex market is before entering large trades.

Understanding the terminology

The name of the tool comes from two English words and means cutting losses. A stop-loss is a specific type of order that allows you to minimize losses in the financial market. If the trend goes in the direction opposite to your open position, the trade will be immediately closed so as not to increase losses.

A stop-loss allows traders to manage their risks and deposit accounts more efficiently.

Some traders argue that a stop-loss order is used only by absolute beginners. As for the traders, they are supposed to combine different exits, which gives them an advantage. But professionals are well aware that people who think this way eventually go bankrupt and their capital turns into “dust”.

Successful traders must remember that their main task in Forex market is to preserve their capital and protect it from vanishing, and stop orders are extremely useful for accomplishing it.


The way it works

To understand what a stop-loss in Forex market is you need to learn how it works. When entering a trade, traders set up certain limits on their losses. After that, they can safely enter the market. It is not necessary to keep the terminal open since all the specified data is stored on the broker's server and a stop-loss will be triggered even if the trader is offline.

A stop-loss can be equal to the size of a trade or just one lot.

Let's look at the following example: Let's say you enter the market to buy an asset worth $100, but the price may change. In any case, its fall will affect your account balance in the form of some negative figures. To secure your deposit against vanishing you must decide how much you are ready to lose on any trade. Let's say it is $10. In this case, a stop-loss should be set exactly at this level. If the open position starts to generate losses, a stop-loss will be triggered to close the trade as soon as they reach the limit of $10.

Why use it

Once you understand what a stop-loss in Forex market is, you can safely use such orders in the market. This is especially important for novices who do not have the skills to quickly adapt to changing trends and run the risk of going bankrupt in an instant.

A stop-loss has several advantages:

 

  1. Such an order is a kind of protection against any problematic situation in the market that can lead to big losses.
  2. The closing of a trade position will occur no matter what as soon as the loss on the asset reaches the specified level.
  3. It allows you to strictly follow the chosen behavioral strategy in the market.
  4. There is no need to monitor market movements and keep the terminal active all the time.

 


However, in order to become successful, it is not enough to just understand what a stop-loss in Forex market is. Calculating the risk-reward ratio is a huge challenge for many traders. You need to take into account not only your financial capabilities but also the fact that there may be a sharp price jump against the trend and your position will immediately close, although the trend will continue to advance confidently.

If it is difficult for you to make the right decision and you are worried that you will use your resources irrationally, it is wise to take advantage of modern achievements and start trading on Forex with the help of trading advisors. They stick to proven strategies and will protect you from rash actions.

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