People trade the forex market with the hope of accruing a substantial amount of profit. Amidst the pursuit of profits, there is always a risk of losses piling up. A stop-loss order is, therefore, an important aspect of risk management in the forex market.
A stop loss is simply an order placed to sell a security once it reaches a particular price. The order is placed to limit the accumulation of losses on a given position. The tool comes in handy when one does not have the time to sit in front of a computer to monitor the price movement.
The use of a stop-loss order is inevitable as the market will always do what it wants and move away from a predetermined position. Therefore, a stop-loss order makes it possible to control a losing position. Cutting losses much earlier is a sure way of staying in the game much longer to learn, gain and increase the chances of success.
A stop-loss order plays an important role in mitigating an investor’s loss in the forex market. Likewise, it helps eliminate emotions that can impact trading decisions. Stop-loss orders come in handy when one is not able to watch opened positions throughout the day.
Types of Stop Loss Strategies
Confluence stop loss are the most popular type of stop-loss orders used in the forex market. In this case, traders rely on moving averages as well as support and resistance levels, highs and lows to set the stop-loss order. In this case, the stop-loss order is placed on the other side of a support or resistance level as well as high or low.
Volatility Stop Loss
A volatility stop loss is a more advanced stop-loss order deployed by professional traders. The order stands out as it adapts to changing marketing conditions. In this case, whenever the volatility is high, traders would deploy a much larger stop loss to account for any wild swings. Conversely, whenever volatility is low, traders would use a conservative stop loss.
Trailing stops are other commonly used stop-loss orders in the forex market. Unlike other stop-loss orders, trailing stops adjust accordingly as a trade moves in a trader’s favor. In this case, a trader can set a stop loss to adjust after every 10-pip movement.
For instance, if a trade is tilting towards a profit, a trailing stop loss would adjust accordingly and move upwards with the rising market price. Likewise, if a market moves against you, the trailing stop loss having risen higher will protect from the accumulation of too much losses.
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