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In alternative investments to stocks and bonds trading, many concepts are used for entry and exit. Traders may use stop loss to protect every trade executed in the market.
The stop loss indicates the order where one adds the trading position during and after a certain time of starting the trade.
The traders use the technique to request automatic exit when the price reaches a certain level.
In such cases, if the price action moves against the trade, the position is closed automatically.
The stop-loss orders can be of different types – the hard stop loss and the trailing stop loss.
Hard stop loss is the simplest one where the investors place the order at a specific level, and the trade gets automatically closed at the market price when the price action reaches the level.
Such restriction is introduced to contain the financial risk of losing trade.
The trailing option for some financially structured products differs if the price moves against your expectations.
However, if the prices move in your favour, the Stop Loss moves incrementally in the same direction.
The trailing stop trails the price action as the prices move in the expected direction.
So, if you choose the stop to trail 30 pips, it will follow the price action confirming the distance when the Forex pair moves as expected.
But the stop remains still if the prices move in the opposite direction.
The basic stop-loss rules
One should always trade with it to get protection from losses where you define the stop when you enter the trade.
Never move the limit unless it is necessary.
One should stick to one per cent of the account risk. For example- If you invest $10000, 1% of the total capital is $100. So this is the real risk in the specific trade.
The risk per cent multiplied by the leveraged amount can be quickly wiped out.
Forex trade–
Plan the trade before entering and use hard stops, even if you have a soft one.
Do not exaggerate the leverage levels and try to minimize them.
Use adequate safety per cent to match the risk-reward preference realistically.
Stick to the plan of trade, gain profits, and never increase the limit.
Traders must have tight restrictions when the currency pairs undergo daily volatility, spikes, and average distances.
A hard stop loss should be chosen depending on the strategy.
The time frame for trade should be shorter, and also one should try to analyze the market and the currency patterns.
Advantages -
One can get cover during fast markets as the exit is triggered automatically.
One can cover positions with it as it becomes easier to handle the condition of loss.
Drawbacks –
One is susceptible to wick stop-outs.
Slippage can result in difficult conditions.
Sometimes, certain automatic algorithm triggers weak exits that one may not consider if they handle it manually.
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