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Learn Forex
The Dangers Of Trading Without Stop Loss Orders
Despite the fact that it is one of the most important orders which a Forex trader can place, a surprisingly large number of foreign currency traders simply ignore the stop loss order.
This type of market order is called a stop loss order for a very good reason - it stops you from making too heavy a loss should the market move against you. So, why do so many traders ignore a trading tool which is specifically designed to protect their trading interests?
The answer is emotion.
The Forex market is a technical market and foreign currency trading must be based upon a technical analysis of the market. But human beings are emotional creatures and, even when the numbers are staring us in the face, there will always be an urge to go with our feelings and let our hearts rather than by our heads dictate our decisions.
If you ask most traders why they do not use stop loss orders they will tell you that one of their greatest fears is that often, despite the fact that a trade is moving against them, their instinct tells them that it is basically sound and that it will reverse in their favor. If they had a stop loss order is placed on the trade, there is a danger that their position would automatically be closed out before the market had an opportunity to reverse.
Undoubtedly there are occasions on which this will happen but all too often it will not. If you are away from the trading floor and don't have a stop loss order in place then all too frequently you will return to find that you have made an unexpectedly large loss and the trader who remains on the trading floor not likely to fare any better, despite the fact that he is there watching the action.
In the latter case the trader can see that the market is moving against him and that his trade is moving into a loss but he hangs in there because he continues to believe that the market is going to turn in his favor shortly. However, as a relatively small loss starts to turn into a fairly large one he finds himself in the position of not only still being convinced that the market will reverse, but also now feeling compelled to hold his position because he needs to recover some of his now large loss when the market does turn. In the end of course he is invariably forced to admit that he has made a mistake and to close his position before an already large loss turns into a disaster.
Even the most experienced traders do not make a profit on ever trade they make and losing trades are a fact of trading life. Nonetheless, the only way to become a successful trader is to minimize the size of any losing trades by ensuring that you put a stop loss order on all of your trades. In this way you protect yourself against movements in market and also stop your heart from ruling your head.
Big Figure: The first two or three digits of a foreign exchange price or rate. Examples: USD/JPY rate of 108.05/10 the big figure is 108. EUR/USD price of .8325/28 the big figure is .83
Dealer: An individual or firm that buys and sells assets from their portfolio, acting as a principal or counterpart to a transaction.
Overnight Position: Trader's long or short position in a currency at the end of a trading day.
Variation Margin: Funds, which are required to bring the equity in an account back up to the initial margin level, calculated on a day-to-day basis.
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