What is Stop Loss
While there’s so much noise around the equity and futures markets, these are dwarfed by the mammoth size of the forex market. With the per day trading volumes exceeding $5 trillion, forex is by far the world’s largest and most liquid market. Understandably, a market of this size is impacted by a larger number of catalysts.
Many Factors Impact FX
- Factors that influence the forex market, moving currency prices in one direction or the other, include:
- Political events: Like Brexit or the US Presidential elections
- Economic indicators: Like interest rates, inflation and employment data
- Changes in policy: Like forming of trade associations between countries or monetary policy changes
- Other events: Like financial crises or natural disasters
- Market sentiment
What is Stop Loss?
To put it very simply, a stop loss is an instruction to sell a particular currency when its price (as measured by another currency) has fallen to a predetermined/specified level. The stop loss order closes out the trading position when losses on that particular trade reach an amount set by you.
A stop loss is designed to limit a currency trader’s loss on a position, especially since it’s impossible to keep watching your position at all times. Moreover, it takes away emotions when trading. When faced with a loss, people often find it difficult to accept that they made a wrong decision or they are overly optimistic that the currency pair will reverse its direction. Setting a stop loss order ensures that you’re protected from incurring heavy losses.
Stop loss is an essential risk management tool that may mitigate losses in the case you’ve made a wrong call.
Volatility: Friend and Foe
The currency market is volatile due to a multitude of factors. These fluctuations present us a plethora of opportunities for a positive outcome. On the other hand, fluctuations may result in a loss in case one takes a position on the wrong side of a market move. In the absence of a crystal ball, none of us is 100% certain about which way the market will move. Given the risk of a currency pair moving in the opposite direction to what we had hoped or predicted, it’s important to have a way of limiting the loss. Here’s where stop loss comes into the picture.
Static Stops: Popular for its Simplicity
The simplest way of setting stop loss orders is at a static price. So, the price that you have set for a position does not change until the trade hits either the stop or limit price (the maximum price that you may have set). The simplicity of this stop loss mechanism has resulted in its popularity.
Setting Stop Loss: Day Versus Swing Trading
While there’s no “right” price or rule of thumb for setting the price for placing stops, here are a couple of approaches that may be kept in mind. If you’re a day trader, you may check the currency pair’s daily price range, and set your stop loss outside the range. In case the market suddenly breaks the trend and moves too far in the losing direction, your position will get automatically closed with the stop loss order coming into effect. On the other hand, swing traders may set their stop loss much farther, even double of the average daily price range.
At the end of the day, it’s knowledge, practice and analysis that help you get the farthest when trading in this massive, dynamic market.
Setting the Stop Loss Order
The price at which a stop loss order is placed is a personal decision, and depends on the trader’s risk tolerance. Traders with little tolerance may set the limit to as low as a 10-pip loss, while others may be willing to risk 100 pips on their position. Traders should consider not setting their limit too low. Doing so would result in the orders getting filled too fast, even with normal market volatility. The price at which stop orders are placed should allow room for a currency pair to rebound in a favourable direction while providing protection from excessive loss.
What this means is that stop loss is not meant to eliminate all risk. The price should be set far enough into the loss territory or at a place from where a return to profitability for that trade seems unlikely.
Where to set stop loss
When you open your trade, the platform automatically calculates the stop loss based on your amount to risk.
To modify your stop loss rate, go to My Open Trades and click the ‘modify’ button
From here you can modify your stop loss and enter a take profit rate.