Why Use Stop Loss Orders?

Before we talk about the reasons why you should consider using stop loss orders, it is important to understand what stop loss orders really are. Stop loss is basically an order that you place with your broker. If you have a security that you want to make a profit on, the stop loss order will give power to the broker to sell the security as soon as it reaches a defined price. Many forex traders use stop loss orders in order to maximize their profits.

Basically, the purpose of a stop loss order is to minimize the loss incurred by the investor on a particular security. Even though it is mainly used by investors for long positions, stop loss orders can also be executed in short positions. Most people think that professional forex traders should not use stop loss orders. However, here are a few reasons why you should seriously consider using stop loss orders while dealing with your broker:

Safety

When you invest money in any type of business, your main aim is to preserve your capital and generate a profit on top of it, but keeping your investment safe can be difficult due to the volatile nature of the forex market. As the name suggests, stop loss orders are designed to stop your losses.  In case the value of a currency falls lower than the loss you can stomach, your broker will automatically sell it at the defined prices, thus saving your initial investment.

Convenience

Another reason why you should consider using stop loss orders is because they are relatively more convenient. Most people often trade on the foreign exchange market when they have free time on their hands. Nobody continues to trade all the time. Needless to say, you won’t be monitoring the activity on the market at all times. What if the value of a currency falls considerably in the past few hours? You will suddenly incur a huge loss.

Rather than throwing away money like that, placing a stop loss order will secure your position and make it easy for you to save your initial investment. This is a particularly good option for people who are going on a vacation and wish to stop trading for a while. If you are stuck in a situation that prevents you from watching the market for an extended period of time, you should definitely consider placing stop loss orders.

There are plenty of traders who have mixed opinions about stop loss orders. Some believe that this tactic is only used by amateur traders who do not have an understanding of the market. Some traders believe that stop loss orders should only be placed at specific levels. Either way, stop loss orders are a great option for people who want to minimize their losses and wish to generate some serious cash in the market.