For a newbie in fx, it is quite obvious that he/she will be faced with a quite common question while trying to get a hang of it, - what is stop loss in forex trading? Newcomers are like – that is what I want to do, to profit not to lose? Who wants to start loss? And then you come to terms with the fact, that to stop loss you have to fathom what is stop loss in forex?
There are a few different types or rather strategies to trade in fx each of which has adhered to them a very specific technical term. One of these terms is stop loss, a form of trading, and a specific type of order placed by the investor to trade.
What is stop loss in forex trading?
Coming to the point; but before that, any beginner has to understand what is stop loss in forex before applying it to trading. Otherwise, all of it will be just another brick in the wall.
Stop loss is a strategy which depends on the fall of a price of the stock in concern. Strategies dealing with falling prices or a deficit are termed as short strategies in fx. The trader uses the stop loss order as a form of risk management, i.e., to avoid incurring a huge loss due to extreme market fluctuation.
“A stitch in time saves nine.”
Let’s illustrate what is stop loss in forex trading with an example.
Considering the case of a trader who invests in a stock then priced at $100. It has a record of fluctuating between $115 and $85 or in other words a 15% fluctuation graph. The trader puts a stop loss order at $80 for the day or at a 20% fluctuation point.
This means that if the stock hits a random deficit or if it shows a tendency of falling further than the price bought at, the trader will limit his loss to 20%. The stock that day ended at a low of $72, a low at which the trader would have incurred a further loss if it had not been for the stop-loss order.
There are a few mistakes which are often made, mostly by those who lack the complete concept what is stop loss in forex trading. The most common one made is a tight stop loss.
Redoubling on the example, let’s consider that the trader limits the stop loss at 10% or at $90. The most important thing to know is that the market cannot always be predicted.
“Show me a broker who’s always correct and I will show you God.”
Stock fluctuations, as the word itself suggests, are not mono-directional and they always rise and fall only to end at a position which might be higher or lower compared to its opening position. So, the trader who incurred a loss at $90 finds the stock closing at a $126 at the close missing out on the opportunity. This is what is stop loss in forex. A trader has to be all eyes and ears to make sure that he/she gets the best out of the market.
What is stop loss in forex trading? - One of the most preliminary and basic questions to the would-be a trader. Hope he/she has found enough help here.