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.
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.
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.
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:
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.