Successful traders know only too well the value of stop loss orders and many would never dream of opening a position without first putting a stop loss order in place. Many traders however struggle with stop loss orders, not because they are difficult to use but because they fear that they will interfere with their natural trading ability.
Of the four main types of Forex trading order the most important is the stop loss order and yet it's surprising how many traders choose to ignore it. It's particularly surprising because those traders who do use stop loss orders invariably make much more money in the long run than those who don't.
It is no accident that this order is called a stop loss order, because that's exactly what it's designed to do - to stop you making a loss! So, why do so many traders choose to ignore a basic tool of trading that is specifically designed to protect them from the market turning against them?
The simple answer is emotion. The Forex market is essentially a technical market and trading needs to be based upon a technical analysis of the market. Unfortunately, however, human beings are emotional animals and even when the numbers are staring us in the face there is still a strong urge to follow our feelings and to be ruled by our heart rather than our head.
One of the main arguments you will hear for a trader not using a stop loss order is that he is concerned that even though a trade is moving against him he knows that the trade is fundamentally good and that it will reverse in his favor to give him the profit he is expecting. However, if he were to put a stop loss order on the trade, there is a danger that his position will be closed out at a loss before the market reverses.
Now, from time to time this will indeed happen but unfortunately in all too many cases it will not. Without a stop loss order the trader who is 'off the trading floor' will return to find that he has made an unexpectedly large loss and the trader who is 'on the trading floor' will not fare much better.
As the latter watches the market move against him and his trading moving into negative territory he'll hang in there in the belief that things will turn in his favor shortly. However, a small loss will begin to turn into a fairly sizable loss and he'll now be in the position of not only still believing that he is right and that the market will turn, but of also being pushed mentally to hold his ground because he also needs to claw back some of his now unacceptable loss when the market does turn. In the end of course he is invariably forced to admit to himself that he got it wrong and to get out of his position before a large loss turns into disaster.
No matter how good a trader you are you will not make a profit on ever trade you enter and losing trades are simply a fact of life. However, the only way to trade successfully is to make sure that you minimize the size of any losing trades and that means putting a stop loss order on all of your trades to protect yourself not only from the vagaries of the market but also from your own emotions.
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