After winning the poker tournament, former derivatives trader Andy Frankeberger stated that, "It's all about risk management. If the market goes against you and you're wrong, you get out. A lot of poker players don't know how to do that because it looks weak. I can fold a hand that makes me look weak. I don't care about my image. I care about winning." That is one of the most important skills to master to trading foreign exchange. Establishing stop loss orders is an excellent means for exercising risk management to maximize profits through minimizing losses in forex strategy.
A stop loss order establishes the price for which a foreign currency position should be liquidated. When the currency unit hits that target price, it is to be sold. The stop loss order prevents a market reversal from turning into a rout if the price of the currency continues to trend downward.
There are many uses for a stop loss order. If a profitable trade has been executed, a stop loss order can function as a hedge to protect against reversal in the movement of the currency price. A stop loss order adroitly placed can maximize the profits for a trade, no matter if it was long term or short term in duration.
If a trade is losing money but the owner feels there is a strong chance of a reversal, a stop loss order acts as an automated forex floor for the price. The trader basically accepts that the position will not rebound and sells. The stop loss order allows for capital to be protected and deployed in another trade.
Mastering stop loss orders is critical for investing, no matter what the financial vehicle being bought and sold.
In the book “Hedge Hunters” which detailed the successes of many of the best money managers around the world, it was stated that even the best are only right for about 55% of their traders. What leads to their outsized profits is the ability to recognize which traders are winners and which are losers. From there, the losing positions are liquidated in as expeditious a manner as a possible while the winners are allowed to ride, registering profits for the investor.
For that, stop loss orders are essential.
The investor accepts that the movement of the price will not reverse to their favor. A “sell order” is executed for the forex position or other asset. The funds are released and then utilized for another trade after the stop loss order serves as an automated forex floor as part of an overall forex strategy.
It may seem counter intuitive, but taking losses quickly with a stop loss order is an essential part of a forex strategy. Setting an automated forex floor with a stop loss order will minimize losses, which allows for the gains to be fully enjoyed. It is impossible to be right all of the time, but stop loss orders allow for the winning positions to be maximized so the profit potential from trades are optimized.