Forex Basics: Stop Loss Orders

You have most likely read plenty of information about stop loss orders and why many traders think they are the key to trading successfully and protecting your account. While it is true that a stop loss order is very important most ignore the fact that a stop loss order serves two purposes and not just as a risk management tool for account protection.

The most talked about use for a stop loss order is to close a losing trade at a price away from your entry and inline with your risk profile.

Here is an example:

You have a $1,000 trading account and trade 0.25 lots per trade with a risk profile of 3%. This means you can risk $30. Each 1 pip move against you in a standard account will equal $1 if you trade 1.0 lots. Since you trade 0.25 lots each pip will equal $0.25. In order to remain inside your risk profile you would set your stop loss order 120 pips away from your entry price in order to not lose more than $30 on this trade.

The other use of a stop loss order is often ignored and most are not aware of it. Professional traders use a stop loss order to exit a trading position for a profit.

Here is an example:

You enter your trade and are accumulating 80 pips in floating trading profits. You set your stop loss order 50 pips away from your entry in order to secure 50 pips in trading profits no matter what happens. This will allow you to ride your profitable positions out longer and you can adjust your stop loss order the more pips you will earn. Should you be connected to your trading terminal at all times you can set a floating stop loss which will adjust itself depending on the parameters you have set.