Why You Need to Use Stop Loss in Trading

The number of active traders in the Forex market is rising fast. People are getting biased with the lucrative profit-taking opportunity in the Forex market and they are always trying to execute more trades with high leverage. But the use of leverage is increasing the risk factors of the retail traders to a great extent. Leverage is offered to the retail traders so that they can make a profit like the skilled traders in Australia.

The majority of the traders use leverage in the wrong way and loses a big portion of their investment. Before you place any trade, you need to determine the maximum amount of money you will lose on that particular trade. In standard practice, the traders use predefined stop loss to protect their trading capital. Some of you might think using the stop loss is only for the losers. Read this article and you will know why it’s so important to use protective stops in each trade.

Mental stops don’t work

The intermediate often thinks the mental stop is the best way to minimize the loss in trading. But mental stop doesn’t work as people stick to the losing trades with great hope. Hope doesn’t have anything to do with your trading system. You have to rely on logic as it gives you more accurate information about the entry and exit point. If you are not sure where to close the trade, you are pushing yourself to the danger zone. Let’s say, you have an open order in the AUDUSD pair. All of a sudden price dropped more than 100 pips. Do you think you could have closed the trades at your desired price? You will lose a big portion of your trading capital due to the massive price drop. But those who use predefined stops would have incurred a small loss.

Eliminate the stress

Without using protecting stops in the trades, you will be under mental stress. After opening a few trades in your Forex trading account, you will get confused to set mental stops for each trade. Though it’s possible to manually monitor the trading asset but this not an efficient way. Most importantly, you won’t be able to trade the market proper discipline. Keeping your mind relax is very important since it helps you to make the right decision. You can’t even go to sleep without setting predefined stops for your trades. You never know what will happen to the price of a certain asset. For this very reason, you must develop the habit of using stop loss from the start of your career.

The risk to reward ratio

The risk to reward ratio may be one of the most important elements in trading. If you trade with a negative risk to reward ratio, you never be able to recover the loss. On the contrary, those who trade with high risk to reward ratio are always making big profits without having any hassle. And for that, you must trade with fixed stop loss. The professional traders never rely on the mental stops as it kills the risk to reward ratio. The traders always know the perfect take profit for their trades. But when it comes to closing the losing trades, using the mental stops is not the perfect way. You must set SL before you execute any trade as it will keep your investment safe.

Conclusion

You never know which trade will result in loss. You might be trading with the major trend but due to the reversal, you have to lose money. Unless you are trading with protective stops, you will not be able to close the trade with minimum loss. Always thinking about the safety of your investment. And never try to save the losing trades by removing the stop loss. Be prepared to accept a few losing trades and stick to your trading strategy.


Image Credits: Mark Finn

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