Effective Risk Management

Traders tend to forget the little things as there are so many facets to look at and brood over when it comes to trading Forex. But we should all come to an agreement that risk is inevitable no matter what instruments traders trade. 

Out of so many ways to manage risk in Forex trading, stop loss can be an effective way for traders to use. How so? Stop-loss order is an order that traders placed with their broker to execute their trade when it reaches a certain price, even if the traders are not present at that moment. It is one of the most useful ways of halting trades when the trades are going against the trader’s target. 

The volatile Brexit period has showcased the importance of setting a stop-loss order. On 24th June 2016, the day when the referendum result was out, the British Pound had one of the biggest plunges in history. The sudden outcry on the Forex market has caught British Pound traders off guard as most of the polls have shown an outright win for the remain-in-Europe side.

It was a good day for traders who had foreseen this outcome but for the majority of traders who had followed the polls’ numbers, it was a difficult day. This example has shown us how shaky the market can get and the risk traders expose themselves to every day.

There are no rigid rules or theories to follow when it comes to placing a stop-loss order. It all depends on the traders’ trading goal and target. If you are a day trader who trades on short-term market fluctuations and on the news, chances are you may need to set a stop loss with a smaller percentage to make sure you hold the lowest risk in every trades.  On the contrary, if you are a position trader, you will be able to handle a higher risk for an extended period of time until the currency appreciates.

Albeit the risk that everyone faces varies, yet having a stop-loss order placed upfront is highly recommended for the sake of traders’ trading account. It does not only help traders to close the trade that is no longer gaining, but it also comes in handy when traders are leaving for holidays or entering a situation where they are unable to monitor their trades.

Moreover, instead of setting a traditional stop-loss order, there are actually several strategies to combine with to enhance the efficacy, enabling traders to enjoy the best of both worlds – minimizing risk and maximizing profit.

Types of Stop-Loss Order

Reverse Stop Loss

It has the exact same function as a traditional stop loss but instead of only helping you to close your trade at the predetermined price, it also helps you to open a new one in the reverse direction. As this strategy requires a bit more analytical approach, it fits better for experienced traders who have done their homework in learning the market trend.

Trailing Stop Loss

Trailing stop loss is like the upgraded version from the common stop loss. The added protection of this strategy is that the order will recalculate its stop’s trigger point when the appreciated currency price moves up, locking the traders’ profit as the trades go up. Just like the old trading adage goes “let your profits run; cut your losses short”, this strategy makes it totally possible and achievable.

The Bottom Line

Traders who think that stop-loss is unnecessary are apparently underestimating the power of an unexpected news or market crash. This downside protection does not only alleviates traders’ risk but also prevents them from trading under any emotional influences, just like a free insurance policy that also cares for your health. It works pretty much the same.

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