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.
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Types of Stop Loss Strategies
Confluence Stop
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
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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