The Role of Stop Loss Orders in Forex Trading

By: Jeremy Morrison.

It is surprising that many traders don’t make use of stop loss orders in Forex trading in spite of knowing the benefits of using this feature. More experienced traders know the importance of using stop loss orders in Forex trading. The main objective of using stop loss order is that it prevents you from losing your hard earned cash. When you place a stop loss order, you are also required to set up an exit point so that trading stops when a specific value is reached. The main role of stop loss order is what the name indicates. To stop loss! It reduces the risk associated with trading currencies.
You can also cancel your order by placing an OCO or Order Cancel Order when the limit order has been attained.

Why do Forex traders ignore stop loss orders?
One of the main reasons for not using stop loss order is that if a trade is going against you, you tend to wait for the market to revert back so that it works in your favor again, so you wait for the positive changes to take place in the FX market. However, if you are using a stop loss order, the moment a limit order is reached, you are “off the trading floor” and you don’t stay in the arena to see if the trade was in your favor again or not. A stop loss order doesn’t let you take the risk. So, it may limit your profits at times. You may regret using a stop loss order at times but in the long run you are benefited. A small loss may take larger proportions so “prevention is always better then cure”.

How does stop loss order work in Forex trading?
If you are buying the currency pair EUR/USD at 1.47739 and you want that the position should automatically close when it is moving 100 pips against you, a stop loss order is set at 1.46739. In case you are short, the stop loss order is placed above the existing or the current price, 1.48739. In a nut shell, using a stop loss order may limit your profitability but it doesn’t allow loss to assume a larger proportion.