Forex is a leveraged market, so for every dollar a trader invests in a trade, the broker can lend him a fixed amount, which exceeds the trader's real capital, so that he can make more profit, a stop loss is used to solidify the end of the relative trade.
In the following LVMexchange knowledge centre article, we will answer the following question: What is stop loss in Forex? We will also see different examples and terms related to stop loss levels.
What is stop loss
Let's start with an example of what we just previously mentioned, you see… a stop loss simply ends a trade from continuing, but, there’s more that can be said.
If you have $500 with a leverage which we support of 1: 200, we will allow you to open a position worth $100,000. Leverage is needed because it takes a lot of money to control positions in the forex market. In fact, the movements of currencies are very small, for example, a value of 0.001 per unit of movement, and for this to give any kind of decent return which is worth your while, large sums of money must be invested in each trade.
Many traders do not have these amounts to invest, so leverage was designed so that forex traders can finance their operations. The problem is that leverage can sometimes cause unwanted situations due to its ability to magnify both possible benefits and possible losses, directly affecting the trader's capital.
If you as a trader have several open trades on your account, it is natural to close the least profitable ones first and leave the most profitable ones open. The key question is: How to avoid the forced closing of positions in Metatrader? It is necessary to take some measures to avoid reaching the stop loss before you get to it on a trade which is costing you money (losses), which is essence boils down to one thing - being timely in your monitoring. And force closing positions should your stop loss be set too early or the asset direction has taken a different route to how you expected. We suggest following some of LVMexchange’s tips below:
- Avoid opening too many orders simultaneously. Why? A higher number open trades ormeans that a greater amount of capital to monitor in a live situation.
- Use a stop loss to control profits, because you may notice that you are in the money on a trade, but what goes up, can sometimes fall. Be vigilant with any spikes, and if you’re making money, don’t get greedy as it may fall quickly and sharply.
- If you have an open position with large quantifiable losses, it’s just our personal opinion based on experience, but don’t just wait and hope for it to go back in the green direction. We agree though that you can never say never.
From what we found with our traders amongst the more experienced, our LVMexchange.com long term clients… is that most successful traders only operate with approximately between 2.5% and 5% of their capital. If you reach point where your trades have gone into the negatives on such a wide scale that your balance reaches zero, you may need a little more training and practice, together with better use of stop loss. Using one of our demo accounts can be a viable strategy until you feel like you are confident with real money, once that happens, get back to real trading!