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By: Johnny Mitch
What is Stop Loss?

Stop loss is a safety measure utilized by investors to prevent excessive losses - usually found with configurations in "long" or "short". If the outcome of a trade comes out as adverse and cutbacks are incurred, the Stop loss will kick in and halt the trade at a pre-specified position set by the investor.
Let's talk about the benefits of using Stop loss and understand better how and when we must apply it.

When to work with Stop Loss

While most certainly not essential, lots of traders prefer to utilize Stop Loss mainly for the following reasons:

Small Equity Account

Most inexperienced investors choose to reduce losses whenever possible while nonetheless generating occasional small profits throughout their initial steps. The Stop Loss plays a vital role in this regard by retaining the losses under the trader's control to enable them to determine a set amount of risk they are willing to take for every single trade; all in accord with market and revenue expectations. Most investors typically begin with a small account which doesn't really provide the opportunity to swing-trade nor can they afford to keep their postures open for weeks and even months, which is actually when Stop Loss comes in even more practical.

Stress-free Trading

The Fx Market can be a misleading beast from time to time, throwing off speculators' expectations due unreliable developments and movements. Final results can be at times totally the opposite of what one would usually anticipate.

Take into consideration a circumstance in which a trader expects the market to go towards a bullish pattern should the fundamentals turn out being optimistic, nonetheless things don't go as expected and he has to suffer substantial cutbacks. In this kind of situation, two emotions just about every trader should try their very best to avoid; greed and dread, simply because what commonly occurs is they turn out losing a lot more money while attempting to recover from earlier trades.

This is where Stop Loss comes into play. It helps forex traders operate in a stress-free manner in which they do not need to worry when the market takes an unexpected turn; by permitting the investor to manage how much of risk they are able to take and the maximum damage that they can afford to bear. Therefore, one can endeavor to make as much revenue as they possibly can, with the amount they've got invested, knowing that the situation may very well take a turn for the worse. Until the preset Stop loss hits, traders do not need to worry about concluding their trade in early loss, since there is always the possibility that the market might turn around towards a favorable direction from that level onwards.

Inactive Trading

Most novice forex traders do not really spend many hours, everyday in front of a screen, monitoring every market move to trade the fx market. It's quite impossible even for a professional investor to monitor the market 24 hours a day, everyday. So what happens in the event that a trader realizes a prospective time to trade during which he has expectations of the market going in a certain direction, yet for one reason or another he cannot monitor the market during that time? A savvy investor never misses such opportunities and always reaps the benefits of such trading sessions in which they anticipate the price movements to be beneficial for their trading. This is where Stop Loss comes in handy yet again, allowing fx traders to simply key in the trade or place it in a pending order after setting up the Stop Loss in accord with their risks. In these situations, worst-case scenarios in which the market takes a turn for the worst, they don't have as much of a risk with regards to their non-active trades. The reason for this, is that the risk never exceeds a particular position set by forex traders, so they are free to explore the prospects without consistently watching the trade itself.

To summarize we have to stress the fact that even though stop-loss order is such a straightforward tool to apply when trading, quite a few fx traders almost never actually apply it. Whether one wishes to avoid substantial cutbacks or perhaps to lock in profits, the majority of trading styles may benefit from this great tool. Consider a Stop Loss as being an insurance policy: one hopes they will never need it; nonetheless it's comforting just to know that one has this form of protection in the event they decide to use it.


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