For some people, Stop Loss is a taboo and very uncomfortable to be applied. But you need to know that Stop Loss can be useful to protect your trading balance.

I admit that Stop Loss isn't the first thing I learned when I started Forex trading. So, let's be frank, I just noticed how useful Forex Stop Loss is after I've lost my live accounts. I mean, I could have saved it from unnecessary losses, had I known how to use Forex Stop Loss earlier. There, don't wait to be a sore loser like me. Start learning how to avoid excessive losses with Forex Stop Loss by reading the guide here!

 

What is Forex Stop Loss?

Forex Stop Loss, as the name suggests, is an automated mechanism to stop-out your position(s) when the price goes against your expectation. The main utility of this feature is to automatically cut current loss before it snowballs into bigger losses. Therefore, a very vital feature for high risk-high reward markets like Forex.

what is forex Stop Loss   Look at the EUR/USD chart above. As you can see, the Stop Loss was set at 1.06500. So, what good is that red line going to do to your trading position, you ask? Say, you made entry at 1.05800 and expecting the price to go down to 1.05000. Hence, you opened a short (sell position). However, instead of coming to your estimation, the price keeps going up, instead.

Forex Stop Loss is an automated safety net to secure your position from volatile market price movements. It'll automatically close your position if the price move against your estimation.

The next thing you know, the price soared to 1.07000, which was far away from your initial prediction. But thanks to Forex Stop Loss, your position was automatically closed at 1.06500. In other words, you have set a security net that has saved you from further -50 pips loss. Well, in the end, it was still a loss. But at least, you incurred less loss than you would, if you didn't use Forex Stop Loss at all.

 

Why Forex Stop Loss Is Important To Learn?

While it's true that the Forex market promises huge returns, it also comes with high risks. Y' see, the profit is only half of the cake if you catch my drift. Once, as a beginner, I usually let positions ran without any Forex Stop Loss. I didn't see the point of using it before, mainly because I was a fairly successful scalper. In case you didn't get it already, I always close my position manually. Well, until that time when my friend introduced me to news trading.

 

Before I started to use Forex Stop Loss:

Scalping during news trading was, to my experience, akin to riding a jet coaster with loose security-strap. I remembered that it could reap considerable profits in a short amount of time, but that was only half the story. During the news release, price volatility jumped rapidly. You simply can't expect the price to keep moving in one direction.

Because of that, some of my positions already scored profits, but worse still more positions accrued losses after losses. I just didn't quite understand what went wrong at that time. The next thing I knew, I suffered the symptoms of overtrading. I kept opening positions during the news release, even though in the end I lost more than I could gain. Later, I decided to close my live accounts to stop myself from making worse financial mistakes. Even though I stopped live trading, I was still curious about what made my trading performances grew much worse.

There, I went back to my friend and consulted with him about my trading issue. From there, he identified my trading problem right away. He explained to me that the main issue was the absence of Forex Stop Loss. Specifically, I closed the profiting position too fast and letting losing position running for too long. That's because without Forex Stop Loss I was forced to intervene directly with my active positions. Subsequently, I closed my positions manually based on my fear and anxiety.

So, I tried his advice; I started to use Forex Stop Loss.

 

After I started to use Forex Stop Loss:

At first, I tried to simply slap all my positions with fairly random Stop Loss values. Well, It didn't see any noticeable improvements, so I kept consulting with my friend. Turned out that I didn't use it the right way. To optimally benefit from Forex Stop Loss, I also need to learn about Taking Profit. No question asked I followed his suggestions. After a month later, I started to see slight improvements in my trading performance. Here's why:

  • Forex Stop Loss closed all the losing positions before it turned worse.
  • Take Profit "locked-in" all the profiting positions. Especially valuable when a reversal is about to happen and the price reaches its peak.
  • Simply put, Stop Losses reduces the losses while Take Profit secures your gains.

Now, whenever I open a position, I'd set it with preset Forex Stop Loss and Take Profit. At this point, I simply won't let any position running without it anymore.

 

How to Use Forex Stop Loss?

Each trading terminal comes with a different user interface. Commonly, you need to look at Forex Stop Loss and Take Profit input bars, like this picture below: stop loss and take profit

MetaTrader4 user interface

Standard use of Forex Stop Loss

Depending on the current price and your intended entry position, you can adjust Forex Stop Loss either by long or short position:

Long position Forex Stop Loss setup:

Use this setup when you are going to buy it. Set Forex Stop Loss value lower than your current ask price ("buy by the market", or higher quote). By this setup, the Stop Loss will trigger when the price goes down to your set Stop Loss level.

stop loss for long position

Short position Forex Stop Loss setup:

Conversely, Use this short position setup when you are about to sell. Set Forex Stop Loss value higher than your current bid price ("sell by the market", or lower quote"). Therefore, the Stop Loss limit will be triggered when the price moves up to your set Stop Loss level.

stop loss for short position

Well, that's the most basic setup you can do with the Forex Stop Loss level, but that won't be enough. As I said before, you'll also need to adjust both Stop Loss and Take Profit levels according to the risk vs. reward ratio. In addition, there are also trailing Stop Loss and break-even Stop Loss feature. Both of them are usually preferred over regular Forex Stop Loss when you are swing trading.

 

Using trailing Stop Loss or break-even Stop Loss for swing trading

First and foremost, if you're not accustomed to swing trading, leave this section. That's because both of them are only optimal if your Forex Stop Loss and Take Profit goal are rather distanced away from your entry. In other words, trailing and break-even Stop Losses will only work effectively if you intend to make gains from huge pips movements; more like in a range of hundred pips away.

a. How Trailing Stops works:

Let's say you are going to short GBP/USD @ 1.2161. You set Forex Stop Loss @ 1.2300 and Take Profit @ 1.2004. In other words, you set your Stop Loss 140 pips away and Take Profit 158 pips away from your entry price level. That is the defining and clear distinction of swing trading. trailing stop loss

Take note that trailing Stop Loss will only work when the position is already in the profit (green zone). So, if you set the trailing stop to move at 30 pips intervals, then it will move 30 pips forward each time the position reaches a certain threshold. Technically speaking, each trading terminal has its own definition of what and how this threshold works.

For instance, the cTrader trading terminal comes with its so-called "Advanced Stop Loss" mechanism. In their term, trailing stops will "Trail for" defined intervals each time a designated position makes "Trigger when gaining" positive pips. So, if you set it to "Trail for" 30 pips and only "Trigger when gaining" 40 pips, the stops will trail 30 pips forward each time the position gains 40 pips into the direction Take Profit limit.

ctrader advanced stop loss

b. How Break-even Stops work:

Simply put, this mechanism will move your original Forex Stop Loss to your initial entry point. I rarely use this setup because most of the time, the price reversed and triggered break-even Stop Loss before it bounces back up again. Therefore, I recommend you to use this setup only when the current trend is strong. But in all honesty, it's a rare occasion to see any use of this particular setup. Simply because there weren't many strong trends that can stay moving in one direction for a considerable length.

c. Precaution for using Trailing and break-even Stop Loss: More often than not, unpredictable market volatility renders both of those advanced Stop Losses useless. That's because the price won't stay moving in one direction. Therefore, setting your trailing Stop Loss too tight (read; scalping) will trigger the trailing stop loss too early. Conversely, if it's too far away and you miscalculate the strength of the current trend, you won't make any profit either.

 

Conclusion

Forex Stop Loss is one of the vital tools to protect your running positions from unchecked losses. By all means, you should learn and simulate it on demo accounts before trying a live Forex trading account.