Forex trading education - Stop-Loss Order
The meaning of this order is just as its name implies. The order cuts off our transaction at an exchange rate that was predetermined, or rather, it limits our loss, if there is one, to an amount which is known and determined in advance.
For example: if we bought Euros at a particular exchange rate and we placed a stop-loss order of 100 pips below the exchange rate of purchase, we know that for this transaction we can only lose 100 pips.
The advantages are:
This order obliges us to make an orderly and timely plan for our position and to manage risks in advance.
It prevents large losses and limits our loss to a maximal sum which is known in advance.
It prevents the intervention of emotions, "hunch" which may effect our decisions. The order is put into action in a computerized and fixed manner.
It prevents the need to constantly follow our position.
Stop-loss makes the Forex market the most secure market in the world
Let's assume that the exchange rate is 1.5520 and you think that the rate will rise to 1.5320. If you want to gain 1000 USD through a transaction of 100,000 Euros, butare not prepared to risk more than 200 USD, what will you do? Pick up the phone and call the broker, and request to "buy me 100,000 Euros, and place a stop-loss order at an exchange rate of 1.5200, 20 pips below the entry rate".
In other words, if the exchange rate rises, great - we have gained. If the exchange rate falls, and reaches 1.5200, the transaction will be closed at the moment the exchange rate reaches a rate determined by the order and our loss will only be 200 USD.
Thanks to the stop-loss order we have placed we can rest easy and not lose more than what we allowed ourselves to lose. There is no channel of ivestment in which you can set your risk with absolute certainty.
Consequently, we have another important advantage in the Forex market: stop-loss order - it is possible to determine the maximum risk in a transaction. We will learn more about this directive later.
Question: I have 1,000 USD in my account, I bought 100,000 Euros at an exchange rate of 1.5220. The rate fell by 120 pips. What will my position be?
Its very simple, in a transaction of 100,000 Euros every pip is worth 10 USD, or rather, 120 pips is equal to 1,200 USD. Will the bank allow me to go below my level of collateral? never.
remember: When you don't definea stop-loss in transaction, the stop-loss is the sum of money that you have in your account with the broker. If you have no remaining collateral, the transaction will be imminently terminated. Therefore it is important to place a stop-loss order.
Whats Next?
* Trailing stop
Or go back to the education index
For example: if we bought Euros at a particular exchange rate and we placed a stop-loss order of 100 pips below the exchange rate of purchase, we know that for this transaction we can only lose 100 pips.
The advantages are:
This order obliges us to make an orderly and timely plan for our position and to manage risks in advance.
It prevents large losses and limits our loss to a maximal sum which is known in advance.
It prevents the intervention of emotions, "hunch" which may effect our decisions. The order is put into action in a computerized and fixed manner.
It prevents the need to constantly follow our position.
Stop-loss makes the Forex market the most secure market in the world
Let's assume that the exchange rate is 1.5520 and you think that the rate will rise to 1.5320. If you want to gain 1000 USD through a transaction of 100,000 Euros, butare not prepared to risk more than 200 USD, what will you do? Pick up the phone and call the broker, and request to "buy me 100,000 Euros, and place a stop-loss order at an exchange rate of 1.5200, 20 pips below the entry rate".
In other words, if the exchange rate rises, great - we have gained. If the exchange rate falls, and reaches 1.5200, the transaction will be closed at the moment the exchange rate reaches a rate determined by the order and our loss will only be 200 USD.
Thanks to the stop-loss order we have placed we can rest easy and not lose more than what we allowed ourselves to lose. There is no channel of ivestment in which you can set your risk with absolute certainty.
Consequently, we have another important advantage in the Forex market: stop-loss order - it is possible to determine the maximum risk in a transaction. We will learn more about this directive later.
Question: I have 1,000 USD in my account, I bought 100,000 Euros at an exchange rate of 1.5220. The rate fell by 120 pips. What will my position be?
Its very simple, in a transaction of 100,000 Euros every pip is worth 10 USD, or rather, 120 pips is equal to 1,200 USD. Will the bank allow me to go below my level of collateral? never.
remember: When you don't definea stop-loss in transaction, the stop-loss is the sum of money that you have in your account with the broker. If you have no remaining collateral, the transaction will be imminently terminated. Therefore it is important to place a stop-loss order.
Whats Next?
* Trailing stop
Or go back to the education index
