How to Use Stop Loss in Forex Trading

Risk management is an important topic for investors and traders. This is because of the many risks that exist in the market, and the fact that no one can accurately predict when a certain risk will happen. For example, for oil traders, no one can predict when a major refinery will have a fire or when geopolitical events might affect supply. For stocks traders, no one can accurately predict when a company might suffer an unforeseen negative event such as a mass product recall or online security hack. Similarly, for currency traders, no one can predict accurately the economic results a country will release. Therefore, proper risk management strategies will help you reduce the implications of a severe market risks.

Professional traders use a number of tools and methods to manage their risks. They use small lot sizes to reduce the potential losses, use small leverage to reduce the amount of money they borrow to trade, and trade only securities they understand well. Another important tool they use to reduce risks in the market is a stop loss.

Stop loss enables you to state the maximum amount of money you are prepared to lose per trade. This amount is a recognition that all trades can either make or lose money. Therefore, having a limit on the amount of money you are prepared to lose is a good thing, because it will give you a peace of mind. Stop loss is a tool available in all platforms, such the forex platforms offered by easyMarkets.

How to set a stop loss

There are many ways to determine what level to set ywour stop loss at. One way is to have a risk-reward ratio for every trade. In this, if you intend the trade to make you £20, you can place your biggest loss to be £30. Therefore, if the trade does well, you will make a profit of about £20. If your trade does badly, the biggest loss you will make will be £30. Therefore, regardless of what happens in the market, this will be the biggest loss you can make.

While a stop loss is a good tool, a better tool is known as a trailing stop loss. The trailing stop is a stop loss that is not fixed. Instead, it follows closely the movement of the security. As it follows the movement, it locks in the profit that is made already while leaving the maximum loss amount intact.

The benefit of a trailing stop loss is that it locks in the profit that you have made. This is because in trading, you can make a good profit and see it disappear before you exit. For example, if you buy crude oil at £50, you can see it move up to £53. As it does this, your trade is positive. However, if there is a major market news event, you can watch the price move below your purchasing price. If you had a stop loss, you will still make a loss when it is triggered. If you have a trailing stop loss, you will make a loss but the previous gains will be locked in.