The fact that a person can make a lot of money through currency trading without actually investing a lot of money is one of the most crucial reasons why the market has grown in popularity in the last decade or so. This aspect of the forex market means two things.
The first is that the potential for profit in the forex market is very high provided a trader can use the right currency trading strategies and techniques. The other is that the forex market does not discriminate between rich traders and poor traders i.e. all traders are rewarded or punished on merit by market fluctuations.
Consequently, the forex market can be seen as a neutral market which rewards skill and talent but punishes mistakes. The biggest skill of currency trading is to be able to negate the negative aspects of market volatility without actually affecting profit potential. The best tool to do this is a stop loss order.
What Are Stop Loss Orders?
If you are new to currency trading then it is possible that you do not know what stop loss orders are. These are essentially conditional closing orders through which you can have a position automatically closed. The condition is a losing rate below the rate at which you initiated the trade. The right usage of stop loss orders, however, is very important. The following is a list of what you should not do with stop loss orders.
Placing It Too Close To Starting Point
The first mistake is to place stop losses too close to the starting point. This can create problems because forex rates always ebb and flow. This means that by placing the stop loss order too close to the starting point you are risking being stopped out even if the trend does move in your favour.
Placing It Too Far From Starting Point
Another wrong way to use them is to place stop loss orders too far away from the starting point. This is not useful because the whole point of currency trading is to make profits and prevent losses. Therefore, if you place stop loss orders too far away then there is nothing to stop you from incurring huge losses. Needless to say, small losses are better than big losses.
Trying to Use It to Breakeven
Another trick which forex traders end up employing is to use stop loss orders to breakeven. What they do is that when their positions gain a few pips they move their stop loss orders to the breakeven point.
While this currency trading trick may seem very handy to you, it is actually just an extreme measure of placing stop loss orders too close to the starting point because you can end up losing the chance to make a lot of profits this way.
Placing It Arbitrarily
Using stop loss orders in currency trading is a technique that needs to be used with precision and planning. Arbitrarily placing stop loss orders on a hunch or personal preference is, hence, not recommended.
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