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Stop Loss Orders And Forex Trading
By dbFX on September 5, 2009 | More Posts By dbFX | Author's Website
With today’s technology, investors now have the ability to trade in the foreign exchange markets with real time information via the web. As with any investment class having a strategy is the key to success. With the tools available on forex trading platforms these days, you can easily implement your trading strategy.
A basic strategy consists of three components (1) the price you are entering the market (2) your target profit levels and (3) the maximum loss you can sustain on this trade.
With dbFX.com for example, when you open a trade you have the ability to link a profit target and a maximum loss level to that trade. Let’s look at the language for Forex trading, a profit order is called a “limit”, as you are limiting your profit and an order to define a maximum loss level is called a “stop loss”, as you are stopping your losses.
The levels of a limit or stop loss order will be in relationship to your original trade or position and the current market. Let’s look at an example, if you have bought EURUSD, then your profit target or limit order will be to sell the EURUSD above the current market and your maximum loss or stop loss order will be to sell below the current market. Conversely, if you have sold the EURUSD, then your profit target or limit order will be to buy the EURUSD below current market and your maximum loss or stop loss order will be to sell above the current market.
Many forex brokers offer trading platforms that allow you to place stop loss orders on your positions. If a currency rate reaches a certain level - the level you designate - you are automatically exited from your position. dbFX has a forex trading platform that allows you place stop loss orders.
You should realize, however, that forex brokers do not guarantee stop loss orders. While they try to fulfill them as directed, moves on the forex market can be so swift and sudden that your position goes beyond the level so quickly that nothing can be done.
Additionally, you can use a trailing stop loss which is a special type of stop loss order. Some forex brokers, including dbFX, the online trading platform from Deutsche Bank allow this special kind of stop loss.
A trailing stop loss automatically adjusts in increments on a tick-by-tick basis, allowing the level of your stop loss to move or trail as the market moves in your favor. This allows you to minimise the level of your maximum loss as the market moves in your favour.
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“A trailing stop loss automatically adjusts in increments on a tick-by-tick basis, allowing the level of your stop loss to move or trail as the market moves in your favor.” This is true and this can be your advantage. This can lessen your chances of loss, correct?
Yes, the use of a trailing stop can limit your losses. If the market moves in your favour to a point above your trade entry level, the trailing stop will move your stop to this level where you can lock in a profitable position.