Setting a Stop loss order in forex trading is mainly used at limiting the likelihood of losses just in case of negative market movements.
Stop loss is employed solely with open positions. Once the market conditions are not favorable for a forex trader and also the current market quote has reached the amount of Stop loss, the deal is automatically closed. Therefore, Stop loss assist the trader to manage losses and just in case of failures to stay safe with a good part of the deposit.
If a Trader doesn’t use Stop loss orders, the position is closed by the broker once the total amount of losses equals the total of the deposit.
There are various types of Stop loss orders: fixed Stop loss, Trailing Stop and combined Stop loss.
Fixed Stop losses are set when opening positions. They can’t get replaced till the deal is closed.
Trailing stop, on the contrary, may be replaced any time based on the market movement. Trailing stop order can get replaced either manually or automatically based on the traders settings.
Currently, there are various discussions on whether or not it’s necessary to use Stop losses or not. Some traders believe that Stop loss ought to be mandatory for trading, stating the power of Stop losses to forestall the loss of the entire deposit. If the market price is going in a direction that doesn’t correspond to the trader’s strategy prediction, the position that hasn’t been closed in due time may result in big losses.
The opponents of Stop loss believe that this order will limit not solely losses, however profits also. Because the market movement is commonly unpredictable and surprising, it will develop with the trader’s expectations although with some periodic bounces crossing the Stop loss line. During this case, the position is closed with losses although it would have been absolutely possible to close it with profit.
As a rule, the choice on whether or not to use Stop loss or not depends on the individual strategy of a specific forex trader. Therefore, there is no single opinion on the need of using stop loss orders.