What is Stop-Loss in Forex Trading?

Trading volatile markets like Forex comes with a lot of risks.

Currencies can alter in value in the blink of an eye, leaving traders with open positions exposed to potentially destructive conditions.

Leverage is another factor that needs to be considered because while there is the opportunity to make huge gains, there is also the possibility of significant, damaging losses.

That is why the leading brokers, as confirmed in this eToro review, enable you to implement several techniques that protect your position from sudden and unforeseen losses.

The most commonly used of these is the stop-loss.

What is Stop-Loss?

In its most straightforward application, a stop-loss is a nominated value below your open position at which you want to close a trade.

Should the market turn against you and your trade enters the red, the stop-loss will ‘stop your loss’ getting any worse – hence the name.

The object of the stop-loss is to hedge your position in a volatile market, ensuring that a downturn doesn’t entirely decimate your bank.

Why is Stop-Loss Important?

By following basic trading advice, even newcomers to Forex can be successful, but having a plan for a downturn is essential.

All traders should be utilizing a stop-loss, but especially those who are holding Forex currency pairs for the long term and those who are unable to regularly check their position via their broker’s website/app.

Even swing traders and scalpers should be using the function because, ultimately, small gains can easily be wiped out by one considerable losing trade.

The beauty of a stop-loss and similar automated trading tools is that they take the emotion out of your trading, so if you are somebody that struggles with discipline and knowing when to close a position, then at least this decision is taken for you.

The reality is that no trader, no matter how good their technical analysis and how switched on to market news they are, can completely predict what the future will hold. Therefore, protecting your bankroll with a stop-loss is essential.

Types of Stop-Loss

There are a couple of different stop-loss options you can use, and here are two of the easiest to understand.

A static stop-loss is the most basic of the form and simply requires you to designate a price below your entry position at which your trade will be automatically closed. That enables you to set your risk-reward ratio based upon your trading ideals.

Meanwhile, a trailing stop-loss introduces a series of stop points that can be adjusted to reflect the flow of the Forex market.

So, let’s say you enter a USD/JPY position at 105.00 and set your stop loss at 90.00. If the market moves in your favor to 108.00, you can adjust your stop position up to, say, 95.00 to reflect that.

This is a tool that enables you to enjoy a positive price fluctuation while still hedging your risk – albeit by closing your position higher than your original stop point.

There are some other ways that you can utilize a stop-loss with your chosen broker, but these are just two options you can implement to protect your long-term profitability.