There is a lot of jargon associated with forex trading. If you want to become a successful forex trader, learning the terminology and what tools to use is an essential part of the process. Stop loss orders are one of the trickier concepts for forex traders to get to grips with. In this article, we are going to examine what stop losses are and how to use them.

What is a Stop Loss?

As the name suggests, a stop loss is an order to that prevents you from making a loss on your trade. In simple terms, stop losses are an instruction to sell when a trade reaches a certain price. Forex traders use stop losses to avoid making significant losses on their trading position. They are useful because it means you don’t have to sit staring at your monitor 24/7. Once you have set up a trade and placed a stop loss order, you can then walk away and forget about it. The stop loss will only come into effect when your trade hits the mark.

Trailing losses move with the price, so if a price rises, the stop loss rises with it and your tolerance to risk remains the same.

How to Use Stop Loss Orders

How you set up your stop loss orders will depend on your trading style. Forex trading Australia day traders usually work within the parameters of a normal price range for the currency pair they are trading. They use analytical tools and set a stop loss at the usual outside parameters. That way, if the market goes crazy and their currency pair shoots right out of the ballpark, they are protected. Instead of losing your pants, the stop loss order will come into effect and your trading position will close.

Swing traders do things differently. They want to give their trades more breathing space, but they don’t want to lose too much in the event of a swing. A swing trader will typically set his stop loss deeper into loss territory.

When to Set a Stop Loss

The idea of a stop loss order is that you decide at the beginning of a trade where you want to draw a line. Think about how far you are willing to let a currency price lose before you pull the plug. The position to take is one where there is zero chance of a return to profitability. In other words, at the point where it is sensible to grab a life jacket rather than go down with the ship.

The reason why forex traders set stop losses at the start of a trade is that it removes emotion from the equation. Emotion is the antithesis of successful forex trading. If you wait until a currency price is sinking faster than the Titanic before you close a trade, you might be foolhardy enough to hang on just a bit longer, in the hope of recovering your position.

As any experienced trader will tell you, that’s a seriously bad idea. Set a stop loss, leave it to work, and see what happens.