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Stop losses are extremely important to use, especially when it comes to mitigating your trading risk. By the end of this article we can expect you to place a stop loss on all your trades to protect yourself from any uncertainty in the market.
For our discussion about take profits, stayed tuned for the next article or visit the topic now to jump ahead.
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One of the most important features on any trading platform is the stop loss feature. Please make sure you are using it. Oh, how so important it is. Hopefully you are here today to learn more about it. We explain more below to demonstrate why stop losses are important when managing risk.
First things first. Trading losses are a normal part of the trading journey. This is something that many traders do not know. Even the most professional and profitable traders all have losing trades. In some cases, successful traders may in actuality have a higher number of losing rather than winning trades (while overall profit remains higher).
So, for example for the month of October. A professional trader might place 100 trades. 65 trades are losers. 35 trades are winners. That doesn’t mean you made a loss. In this case the 35 winning trades could outperform the losing trades. Meaning, the losing trades in totality could have lost $1,000 and at the same time the winning trades in totality could have won $5,000. In this case you will have made a profit of $4,000 that month. Do you see where I am going with this?
How are traders limiting the losses on their trades to manage their risk? The answer is very simple. Place a stop loss to limit your losses. Before you enter a trade, you should do the math. If this trade goes as I expect it, I will profit this much. If it goes against what I expect, then I am happy to lose this much.
Do not open a trade and let it ride without a stop loss. This could be very dangerous for your account. In most cases you will end with a zero balance very quickly if you adopt this style of trading.
Another dangerous habit is thinking that the trade will ‘eventually’ move in your favor. In such a fast paced market, that might never happen, let alone before you empty your account.
If you fully analyze and study your trade before you enter the market, you will figure out that the stop loss you place is the absolute most you are willing to lose on this trade. If the price starts moving towards your stop loss, and you think to yourself, I should move it a little further to prevent the loss, then your analysis to start with was wrong.
Not every stop loss you place will be perfect. However, the more mistakes you make, the more you will be able to learn from that. The idea that you will master the trading profession in one week, one month, one year is an incredibly misleading idea. The traders who profit in this market are ones who are constantly learning and being patient. And there is no reason why you shouldn’t be like that.
In our Education Center you will find more articles about risk management and how you can protect yourself sufficiently when trading in the forex market. We recommend you check out more of our content to get more knowledge under your belt. Feel free to contact us at any time, we are always happy to have a discussion with all our clients.
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