A stop loss order is a forex market order that is designed to automatically close out a trade once it has fallen below a certain limit. Essentially, stop loss orders put a limit on the downside of a trade. This helps traders avoid hanging on to a position for emotional reasons when the market moves against it.
Stop loss orders can also be used to preserve profits, as is the case with a trailing stop that is adjusted up as the position profits. When using the stop loss orders to protect against losses, however, a forex trader must take into account how leveraged the position is. Leverage magnifies both gains and losses in forex, so it is generally a good idea to keep stops close to the entry position in order to preserve trading capital from large losses.
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