Risk and Stop Loss Orders

Risk and Stop Loss Orders

Submitted by adil on Fri, 12/27/2013 - 18:14

Against common perception, stop loss orders are the easiest method to limit the risk and increase your chances of survival while trading in Forex market. However, many traders still refuse to use stop loss orders even after losing huge amount of money on several occasions. Obviously, it can really feel like a slap in the face if your stop losses are hit. Similarly, your anguish can increase even more if the price gets back to the direction you initially wanted to. As a matter of fact, you will be grateful for placing a stop loss order sooner or later. This is because the stop loss will definitely limit the maximum amount you could possibly loss.

So what actually is a stop loss order? In simple words, it is a future order placed by a trader in an attempt to minimize his loss on any particular future trade. He will usually place a stop loss somewhere below his entry point on future contracts that he will buy. On the other hand, he will place stop loss order somewhere above the entry point in case the trade is short.

For example, if a future trader buys one contract of gold at $650 but he only wants to risk $700 on this particular trade. Therefore, he will likely place a sell stop loss at $643 and as a result, the stop loss order will be executed at current market price if gold trades at $643. After the stop price is hit, the stop order loss will become a market order and the trader is not guaranteed to get filled exactly at $643.

Some Benefits of Using Stop Loss Orders:

You should always consider the amount of money you are willing to risk while making a plan for trading future commodities. Therefore, the best and simplest method to implement that plan is to place a stop loss order immediately after the trade is executed on every position. This practice will help you to adhere to your trading plan and keep you disciplined in controlling your risks.

The best thing about a stop loss order is that you will not have to guess about when you will get out of losing trade after placing it. Losing traders usually commit a common mistake of sitting and watching a losing trade converting into catastrophic one.  It is really a demoralizing and demotivating thing to stare your predetermined loss of, for example, $1000 turning into $5000 in matter of days on quote screen. All the traders who do not place stop loss orders will have to suffer from this anxiety sooner or later.

Why Some Traders do not Use Stop Loss:

Some traders are just afraid to take a loss and therefore, do not use stop order loss. However, your ego can hit you really baldy especially if you are trading in Forex market. Some traders strive to be perfect on every trade that is almost impossible to accomplish if you are an active trader.

Sometimes, it also happens that market will turn at the very point where you have placed a stop loss. You might still apparently make profit without using stop loss but it is better to use it rather than suffering from huge losses in the long run.