Very often one continues to work in the Forex market without insight. You may not know where your entry point is in any region on the current trend, but you may invest in Forex shares before changes in this trend. Smart investment means that you need to protect your trades by placing stop loss orders. This must be done before entering the deal, so there is no room for error or last minute decisions. The stop loss level is simply just a per-determined point to exit from the trade when the share price reaches it.
In other words, stopping the loss is like drawing a line on the sand below the share price to say “If the share price falls below this line, this will mean that the stock will not go in the direction you expected and then I will exit from this transaction:
This will allow you to protect your trading plan because you stop your losses quickly and thus protect yourself from the human nature that always drives you to believe that you should be right in all circumstances.
Absolutely, when you enter the trading center, you are 95% expecting to make a profit from entering the deal. Nevertheless, if the share price moves against your expectations, you may feel the need to justify the decision to buy the stock by holding it until it reflects its direction and thus achieve you profits. Perhaps you’ve heard the saying that all major investment losses started with small losses. Well, while the stock continues to move in the wrong direction, your losses are also growing rapidly. This is why you need to place stop loss orders – the matter here is similar to the ejector seat that tells you when to leave the mission.
One of the most common questions I ask when I explain traders stop loss is, “How wide is the distance at which I place a stop order?”
In other words, how much space do I have to give the stock to move in? In fact, there are no conclusive answers to this question because it depends on the time frame you use to trade. If you are a short term trader, the stop loss order should be placed close to the current share price. But if you are a long-term trader, you will have to give the share price more room for movement, and thus place the stop loss order a little further away.
Once you have determined the time frame you use for trading, you will have to be able to exclude market noise (fluctuations) within that specific time frame. You do not have to exit the trading center just because the stock price moved slightly in the opposite direction expected due to the fluctuations in the normal market.
In fact, many losses occur merely because of tight stops.
First, you will decrease the degree of confidence in the trading system due to your early and frequent exit.
Second, and perhaps more importantly, you will significantly increase transaction costs, which in turn represent a large portion of the expenses that you incur while trading forex.
In order to give yourself the full opportunity to compete in this market, you must trade using the system that does not compel you to bear the costs of brokerage services repeatedly. This may be the main reason why I would recommend forex traders to develop a trading system that works more in the long run. By choosing the right trading system and reducing your investment risk, you are on the path to maximizing your profits.