Controlling Forex Risk with Stop Loss Orders

Forex trading can be a risky sport – with many people betting against each other to move currencies on a daily basis. Latest statistics show that the FX markets are now trading over 4 trillion dollars' worth of currency each and every day, making this the largest financial market in the world.

For retail investors such as yourselves, you need to at least admit that you don't have as much influence over prices as institutional buyers and sellers. In fact, the likelihood is that you only have a couple of thousand dollars to invest, and this won't have any influence on the market whatsoever.

Therefore, you are technically a victim of the price movements if and when they happen. Therefore – the most important thing you can keep in mind is that you should always, no matter what, trade with a stop loss order in place.

What is a stop loss order?

To put it simply, a stop loss order is a way you can protect your Forex trading account from amassing a large loss. Essentially, it is a way for you to place a barrier on your own trade, which lets the computer know that this is the level where you will tolerate no more losses.

Let's run through an example of where you might use a stop loss order.

• USD/JPY is currently at 90.00
• You believe that the currency pair will rise to 92.00 in the next few days
• You place a long order at market, and place a stop loss order at 88.50

Let's take a look what would happen in this situation. Say for example that the USD/JPY currency pair rises up to 92.00 straight away. At this point, your objective has been reached, and you are therefore free to close the trade out for a profit.

However, imagine if you were wrong about the trade and the currency pair moved against you. In this case, imagine that it moved to exactly 88.50. At this level, you have told the trading computer that you are tolerating no more losses on the account. You have already lost 150 pips, and enough is enough.

Hence, the computer automatically closes out your trade for you. Now, imagine that the currency pair continues to fall down to 86.00. This is 400 pips from the level where you originally entered the trade.

Thankfully, you will not suffer a loss of 400 pips however, because you had a stop loss order in place which closed the trade for you.

The Effects of Stop loss orders

As you can see, the effect of a stop loss order is to protect the capital in your account. There is nothing worse than leaving a trade open without a stop loss order, only to wake up the next day and find that the market has significantly moved against you.

Hence – ensure that you incorporate stop loss orders in to your next trade to always be on the safe side.