Exploring the basics of stop loss in Forex market
The key to saving your investment from being wasted is to have a good money management policy. Money management is a basic knowledge that every investor should know about. It is the mechanism that investors tend to adopt to minimize their losses while making a profit.
Let’s say that you have placed executed multiple trades in one trading session. But your profit amount hasn’t been much promising. So, we can say that you barely made any profit. However, you are required to pay the brokers their fees and commissions per trade. So, here is the big problem. Even if you are hardly making any money, you have to pay the fees to the brokers.
Then you have to think of any other alternative ways to prevent your money from losing. That’s why money management is an important issue for the learners to learn. It helps you to understand how much you can invest and when you can invest it.
Assessing your risk profile
One of the important aspects of money management is managing the risk in each trade. Risk management is a factor that helps you to determine how much risk you can adopt per trade. Now, the amount of risk you can bear depends on your investment amount and your skills as an investor. When you don’t have the skill to pull off a highly risky trade, you should avoid them. Investors usually take up to 2% of risk per trade and tend to not cross that line.
Now, you can only put on a speculated amount of risk per trade beforehand when you see the market favourable for you to make a profit. But what happens when you see the market getting unfavourable while holding your position. Now there is a chance that you don’t have the luxury to hold your position for long and wait for the market to change its direction. In that case, you have to come up with strategies that will help you to minimize your rate of loss in a failing trade. That’s where the use of a stop-loss comes in.
What is stop-loss?
Stop-loss is one of the most popular risk management strategies that is used by investors to close any failing trade at a level set beforehand. It helps traders to determine a specific exit level for the trade when the trade goes wrong. By using the take profit, you can maintain a decent risk to reward ratio. When you lose a small amount of money, you won’t have to worry about the recovery factor. This is because small losses are easily cleared by upcoming trades. But in case of a big loss, it is quite a tough task to get rid of such a high amount within a short interval. That’s why it is better to set stop-loss beforehand to minimize your losses. Sign up for a free trial and learn about the option financial markets. This should definitely boost your confidence in trading.
Types of stop-loss
There are four major types of stop-loss that are currently in persistence in this shifting market. The first one is a percentage-based stop-loss where the loss limit is set at the percentage of risk an investor is willing to take per trade. The second one is a price-based stop-loss which is set on the price volatility within a certain time. Third in line, we have the support and resistance-based stop-loss and this one is set on the level of support and resistance lines in a price chart. The last one is a time-based stop-loss. From the name, you can have an idea that it is based on a specific duration while holding a position in a trade.
Now, stop-loss is an important factor to understand how much you are willing to lose per trade. This helps you to evaluate your skills as an investor to find out your compatibility to take risks. This setup should be implemented before starting every trade to avoid any sort of humongous loss. Many investors often forget to set their stop-loss which makes them lose a huge portion of their investment. That’s why everyone should be careful when using stop-loss.