Stops in Forex: How to Protect Your Trade from Large Losses
Forex trading is quite risky, so a trader's primary goal is not only to make money but also to avoid losing their own money.
The latter happens much more often than the former, and the main reason most beginners lose their deposits is completely ignoring stop-loss orders in Forex.
There are several options for protecting your position from being completely wiped out, each with its own advantages and disadvantages.
Why is this protection necessary? First, you won't always be at the trading terminal; second, a connection failure or other technical glitch may occur; third, the exchange rate may change so quickly that you lose several extra pips when closing the trade.
The first option is a
time-tested stop-loss order . It's set when opening a new order and is triggered as soon as the price reaches the level you specified.
For example, if you bought euros for dollars at 1.3050, the stop-loss is set at 1.3020. If the rate declines instead of rising as expected, the order will automatically close at 1.3020.
The main advantage of this option is that the stop-loss is triggered even if the trading terminal is not running.
However, as for the disadvantages, it's not always possible to set a value closer to the current price by 10-15 pips. During gaps, the stop-loss is triggered at the first available quote, requiring you to manually move it after the price to lock in profits.
The second option is a trailing stop
, similar to the previous order. However, unlike a standard stop-loss, it automatically follows the price and is triggered as soon as the price begins to move against the trade.
The stop-loss moves only in the direction of the profit, ensuring maximum profit lock-in.
The only drawback is that the order only works when the trader's terminal is running. This issue can be resolved by moving the terminal to a virtual server.
A third option for a Forex stop loss
is less common, but still quite popular, hedging with a pending order.
In this case, if unfavorable circumstances arise, your trade will not be closed, and an additional position of the same size will be opened.
For example, you open a buy order on EUR/USD for 1 lot, and simultaneously place a pending sell order for 1 lot slightly below the current price. If the price declines, the loss will be fixed, and you will then have to choose which order to close.
Forced stops in Forex
We are talking about such tools as margin calls and stop outs, the former being a call from the broker warning you that your trades are incurring large losses.
A stop-out is an order from a broker to forcefully close a trade once the loss on the order exceeds a certain level. Most often, this level is 80-90 percent, meaning less than 20-10% of the account funds remain.
