Your (New) Best Friend - the Stop Loss
Anyone with experience of the Foreign Exchange markets or any market really (equities, cryptos), knows that prices can move quickly. Operating 24 hrs a day, 6 days a week, sharp price corrections can rapidly push profitable positions underwater. Market news influences prices, and as it is released around the clock, it is almost impossible (and ultimately foolish) to believe that you keep an eye on all the moving parts all of the time.
Apart from A.I fulled platforms such as trading.co.uk, that scans millions of data sources per day to only surface information of interest to you and your trading interests, no one can watch the markets 24 hours a day.
As a trader, you need support. A tool that can pull the escape lever on your position if you aren’t able to do it yourself. Introducing your new best friend – the Stop Loss.
If you look up the definition of a Stop Loss it simply reads: “denoting or relating to an order to sell (or buy) a security or commodity at a specified price in order to limit a loss.”
But it is so much more than that.
It’s the type of friend who tells you the ugly truth. The kind of person who rips the band-aid straight off, while promising to take it slowly.
The Stop Loss will tell you the truth, whether you want to hear it or not.
You will lose money trading – Deal with it!
Nobody is perfect. Some of your trades will lose money, (hopefully the minority), but how you deal with those losses and learn from them, will define you as a trader. The key is: live to trade another day (See our 5 rules to consider before trading FX).
Managing your emotions is an eternal struggle for all traders. It’s nearly impossible to stay emotionally detached from your positions, especially if they are losing money.
Tiredness, nerves and fear are not ideal ingredients for making good decisions. Many a trader has held on to a position for too long, simply because they have relied on blind hope that the market will correct itself.
The Stop Loss can free you from these decisions. Yes, you will lose money, but more importantly, the Stop-Loss can limit the damage before you get yourself into real trouble.
Remember – It’s not a guarantee
Like any order, there is no guarantee that your Stop Loss will be filled at your selected level. Once the price hits the designated level, the broker will attempt to sell (or buy) your currency, security etc at the price or next best. In fast-moving markets, especially where market intervention has occurred, this might not exactly be at the level you requested.
Your Stop Loss order should stalk your Profits
A common mistake for traders is to forget to update their Stop Loss orders from their initial positions, once they become profitable. In a previous blog, we discussed the defensive strategy of a successful fund manager, who tries to lock in profit for every trade by adjusting the Stop Losses.
It’s easy to think that your profitable trades will run and run. Trust me, they won’t! You should always adjust your Stop Losses up, matching the profits of your trade. If there is a market correction, you will be able to lock in most of your profits.
Hyfin - Learning Re: imagined
Hyfin is a start-up looking to disrupt the financial education market by making learning more accessible. We think that investors deserve more than a dummy account to practice with, so we have created an app that uses games to make learning more fun.
We have over 40 year’s trading experience working at some of largest global banks. Our main bread and butter is FX, but many of the tips we provide can easily be used if trading equities or even cryptos.
If you want to learn more about Stop Loss orders, check out the sneak preview of our latest course - Understanding Orders: http://hyfin.partners.trading.co.uk/