Use Stop-Loss to limit your losses

Forex Trading Nigeria

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Posted by on Thursday March 1, 2012 16:41:5:

Since trading fx, have you ever seen yourself in a position you wouldn't want to be? Have you seen your forex account being reduced by increasing losses? Have you ever wanted to exit trade even if it means losing a few dollars just to limit your losses. This has happened to me quite a lot and it does not affect new forex traders alone, even for professional forex traders like me, I have seen my self in a position where I would rather not be. I would prefer to just stop my increasing losses in other to enter a new trade.

Imagine if your losses from a poorly calculated trade were are high as $500 on a particular day and the next day sine you were not able to close it, it rises further to $1000 and even to $2000 due to an unexpected market trend. Now for someone who might not have up to $2000 or more in his forex account, his position would have been closed since. This is probably one of the reasons why so many forex traders fail and give up, especially the newbies. They start small with say $200 and hoped to make $10 from a trade. But since they don't control market trends, a position can go sour and prices start falling thereby increasing their losses to say $50 then $100 and then $200. At that point, their forex account gets used up and they would have to refund their account or just give up or rethink their strategy.

My advice to anyone trading forex and wants to limit his losses by a particular amount is to use the STOP-LOSS facility provided by your forex broker. Marketiva's Streamster allows you to set Exit Stop-Loss points when you are about to enter a trade using the dialog box. You can as well set a Stop-Loss after entering a position by clicking on that position.

Exit stop-Loss pts are the best way to control and limit your losses as it allows you to set a maximum loss price. Before using Stop-Loss, you should first of all decide on how much you are willing to lose in case a trade goes bad. For instance you may be willing to lose as much as $10 - $100 then you should set your Exit stop loss to the corresponding pip that would cost you $10 - $100.

Let's say that you are trading with a margin of 100:1 and are using $10,000 for the USD/EUR pair. If you entered at 1.3500 and hoped to cash in when the price goes to 1.3510 for 10 pips which would earn your 0.0010*10000= $10. If assuming your predictions are wrong and the price falls to 1.3490 then you would have lost $10. Now assuming you set the Exit Stop loss when opening or operating the trade, the position will automatically close when price falls to $1.3490 limiting it to $10 only.
But assuming you did not set an Exit-Stop loss and the price keeps falling you may keep losing and losing to more than $100.
So Stop-Loss is a great way to limit your losses although it may also close your trade sooner than you would want and may not allow you to make maximum profit.
It is however a cautious way of trading and could help limit your losses in a turbulent market.