Stop-loss order cuts off your transaction at an exchange rate that you predetermine when the market moves against the trade, i.e. it is the closing order that limits your loss to a maximum amount which is known and determined in advance.
A stop loss order is a type of order linked to a trade for preventing additional losses if the price goes against you. However, it is also a useful tool in case of an emergency, i.e. due to a power cut or internet disconnection for any reason.
If you are in a long position, then it is a sell STOP order.
If you are in a short position, then it is a buy STOP order.
This type of order requires early planning and risk management, as it determines the maximum risk in a transaction.
Stop-loss order is one of the Forex market greatest advantages. A properly placed stop-loss may be the starting point of a successful trade. The order executes automatically, which is often useful in case of losing trade. Traders tend to remain firm when they lose money, so a stop-loss order ensures trader’s safety.
Let’s find out which are the advantages of this great advantage:
Pros of Stop-Loss Order
- It prevents large losses; thus, it limits risk on a trade.
- It prevents the intervention of emotions which may affect your decision.
- The order is put into action in a computerized and fixed manner.
- There is no cost to place this order.
- It prevents the need to constantly follow your position.
Cons of Stop-Loss Order
Are there any cons? What’s the catch? Although, there may be some cons, especially for traders who appreciate high-risk investments, stop-loss order is a safe option for everyone. It’s actually a matter of choice!
Remember: When you don’t define a stop-loss in a transaction, the stop-loss is the sum of money that you have in your account with the broker!
Sources: LQDFX, Investopedia, the balance
PLEASE NOTE The information above is not investment advice.