Finance & Loans

The importance of a stop loss in forex trading

With all the risks that are involved with forex trading, risk management is a key factor of the business. It is one element that will determine whether you will make profits or be wiped out. A stop loss is a vital ingredient in managing risk.

There are three elements in the execution of a trade; the target, the stop loss and exit. Getting these elements right will determine the success of the trade. In an ideal situation you will open and close a trade near the resistance and support levels that will not be broken, but in reality the resistance and support levels will be broken.

Therefore in order to minimize the risk on a trade you need to set a stop loss just above the resistance in a downward trend and just below the support in an upward trend. It is not only the use of the stop loss that is important, the placing of it should be right too. The stop loss order should be adjusted if the market trend is favorable.

If you find yourself consistently hitting the stop loss, it means that your analysis is wrong and the trading strategy should be changed.