There are a number of different order types that you need to know about when you trade on the foreign exchange market, and the stop loss order is one of them. It is crucial that you know how this order works and the different types that you can get. You should also consider how you can use it on the foreign exchange market to help you trading. All trading on the foreign exchange market should be done using the stop loss order.
What is a Stop Loss Order?
A stop loss order is actually a type of limit order. These orders will be placed at a price on the market where your trade is going to be making a loss. When the price reaches this point the stop loss order will change from a limit order to a market order. This means that when this price is reached the order is execute and your trade will be closed at a loss.
The Common Stop Loss Orders on the Foreign Exchange Market
There are two commonly used stop loss orders on the foreign exchange market. These are the hard stop and the trailing stop. You should consider how each of these stop loss orders work and what they can do for your trading.
The Hard Stop Order
The hard stop order is one that many trading platforms insist that you have. There are some trading platforms that will not open a trade if there is no stop loss order. The hard stop will be placed at a pre-determined price. This price is generally the maximum amount you are willing to lose on a trade.
The hard stop will never move from where you have set it. This means that even if your trade makes a profit the stop order will remain the same. For the order to be triggered with a winning trade your trade will need to lose everything it has made and then makes a loss.
The hard stop is the best way to limit the impact of risks on your trading account. When you use a hard stop you are able to set the amount you could lose on a trade. You have to be careful with where you set the hard stop because this should take the type of trading you are doing into account. If you are going to ride out fluctuations in the market then you should not have a very tight hard stop.
The Trailing Stop
The trailing stop works in a different way to the hard stop. This order will move as the trade makes a profit and remain stationary when the trade makes a loss. As soon as the trade turns to a loss the trailing stop will turn into a hard stop.
Most traders will use the trailing stop top ensure that they are able to keep some of the profits that they make. You have to specially set a trailing stop in an order. This means that the trading platform will not insist on a trailing stop in the same way that it will insist on a hard stop.