Although there is potential for profit and rewards, Forex trading is risky. Excessive leverage can ruin an otherwise profitable strategy. For this reason, investors should never trade Forex without a stop loss.
Stop loss is a concept in Forex trading which automatically closes your trade position in cases where your loss on a trade has reached the amount you have set.
Why Use a Stop Loss?
1. Stop loss saves you time:
With stop loss in place, you do not have to spend time monitoring your Forex trades too closely. It allows you to focus on other activities as you have assurance that you will not lose beyond your set amount.
2. It locks profits:
Another benefit of the stop loss is that it locks profits when used as a trailing stop. It is set at a percentage or pip amount that is above or below the current market price, and the price of this stop loss can be set to keep adjusting as the trade progresses.
3. Stop loss cost you absolutely nothing:
It does not cost you any fees to use the Stop Loss feature.
4. It helps boost your risk:reward ratio:
As we have established earlier, the amount of risk in forex trading is largely dependent on the size of your stop loss distance which is measured in pips. What does it all mean? Simple, for example, say you risk 100 pips in a EUR/USD trade and your profit target is 200 pips. This implies that the risk: reward ratio of your forex trading is 1:2, which means you are standing to gain twice as much as you are risking.
5. It minimizes your trading loss:
The application of a stop loss in your forex trading minimizes your loss. It helps you calmly decide in advance when you have had enough. Stop loss will get you out of a loss before it gets too big, or protect your profits.
Hidden Stop Loss
Using EA’s, the MT4 platform can use a hidden stop loss or take profit. The Aforex Trend Trader strategy uses a hidden stop loss, which is good to know because if you use this strategy, you would not observe any stop loss or targets in your trading account. But rest assured, the stop loss is always there and ready to do its job if needed.
If you are using the Trend Trader strategy, then it is important you keep your account online 24 hours a day with a VPS since the stop loss is built into the EA and can only work if your MT4 platform is online.