Forex trading can be very exciting. You can do it even if you are new to instrument training. Traders and investors need a small capital and an internet-enabled device to jump on this bandwagon. You will also need a broker who will offer you a trading platform that you can use to trade. Most of these trading platforms offer different features that can help traders, especially the new ones, in managing their activities and keep losses on the other side. One such brilliant feature is an FX stop-loss order. When used right, this feature can save you from losing every penny.

Stop-loss meaning

What is Stop-Loss Order?

A Stop-loss order is an instruction placed with a broker to buy or sell a security by setting a stop loss level, a specified amount of pips away from the entry price. The Stop-loss order purpose is preventing additional losses if the price goes against the trading position.

 If traders have a BUY order, Stop-loss is an order instruction that tells the trader’s broker to sell the security when it reaches your stop-loss level price. Traders are encouraged to put a stop-loss against the price beyond which they would not like to take the risk. As soon as the prices reach your stop-loss order, your broker will sell your securities before the prices move further down, saving you from bearing huge losses.

How does stop loss work?

Using Stop-loss is based on the trader behavior to make Buy or Sell position. Stop-loss level for BUY position is price level below the entry price, and target above the entry price.  The Stop-loss level for the SELL position is the price level above the entry price and the target below the entry price. After entry order is made, market price fluctuates between stop loss and target price. In one moment trade will be closed if reach stops loss or target price level.

Stop-loss order losing trade example:

BUY EURUSD at 1.30, Stop loss 1.29, target 1.31. Trade will be close with profit if reach 1.31 and with a loss if touch 1.29.

SELL EURUSD at 1.30, Stop loss 1.31, target 1.29. Trade will be close with profit if reach 1.29 and with a loss if touch 1.31.

When close price reach stop-loss that is not always losing trade. Sometimes, traders move stop-loss orders when the trade is in profit, and stop loss and target bring profit for the trader.

Stop-loss order winning trade example:

Example:

BUY EURUSD at 1.3.  SL in forex is 1.29. Target 1.31. When the price is 1.305 traders can move the stop loss to be 1.302. If the trade doesn’t reach the target then the trader will make a profit of 20 pips (trade reaches stop loss 1.302).

Importance of stop-loss

It goes without saying that currency prices fluctuate every day if not every minute. Forex trading is seldom the full-time job of every trader and investor. Since it is impossible for traders to stay hooked to the market at every time, a stop-loss order will mitigate the trader’s loss by informing their broker that they must sell the securities before the prices go any further down. You can decide where to put a stop-loss order after analyzing your risk-taking capacity. This feature is available to both long and short position holders.

The importance of stop loss for trading is high, based on much scientific research, experiments, and traders’ practical experience. A well-developed exit strategy, well-defined stop-loss, is an essential part of any forex trading strategy. Market condition changes during the time, and a strong market reaction can ruin trading performance without a correctly estimated stop loss level.  

Forex without stop loss

Forex no stop loss strategies are dangerous strategies based on the assumption that at some point the order will be in profit. The market can be overbought and oversold for a long period of time and traders very often lose money when they risk more than that can afford. Instruction for closing trade at some price level is mandatory to the practice of experienced traders.

This feature not only saves your tangible capital but keeps you away from emotional turmoil as well. When you know that your losses will not go beyond a manageable limit, you can make trading decisions that are not burdened or clouded. The one thing that is certain about the Forex market is its uncertainty. The market can move in any direction and there is no way that anyone can predict it with utmost surety. Even if you are keeping an eye on the fundamental and technical aspects that can affect the value of a currency, you still cannot control the market. In such an unpredictable market, a feature like stop-loss can save you from drowning in debt.

A good trading strategy followed by bad money management can still leave you in troubled waters. Novice traders often go ahead with safe currency pairings like USD/JPY and EUR/USD, but still, lose money because they don’t know how to manage money. In this situation, simply putting a stop-loss order will not suffice. You must know how to calculate a stop-loss order altered to your financial needs. This has been explained further in this article.

It is evident that a stop-loss is an important tool that facilitates trading by helping traders in managing their capital and psychology. You don’t need to get trapped in the vicious circle of worrying about the unknown. It helps many traders to remain calm and make decisions that are not tainted by fear. It will keep you level-headed, which is an important virtue for any trader or investor.

Types of Stop Losses 

Static stop loss

The word ‘static’ means stationary and that is what this type is about. You can put a stop at a static price and not change or move its position until the trades hit the stop-loss price. This is an uncomplicated mechanism that even new traders can understand without any difficulty. The static stop-loss allows the traders to establish that they are looking for a minimum 1:1 risk-reward ratio. 

This example will help you in understanding how to use a static stop-loss. Let’s assume that there is a swing trader in LA who wants to initiate a position during the Asian session. He is expecting that volatility during the North American or European sessions will influence his preferred trades. He is aware that he could be wrong but he does not want to give up too much equity and still wants to give his trade a chance to grow. In this case, he sets a static stop-loss of 50 pips every time that he triggers a position. He wants his take-profit to be at least equivalent to the stop distance. Thus, he sets each limit order for 50 pips. This is a 1:1 risk-reward ratio. He wanted to take more risk and accept a 1:2 risk-reward ratio, he would set the static stop at 50 pips and raise the static limit to 100 pips for each trade that he will start. 

In addition to the risk-reward ratio that you are comfortable with, indicators also influence how a trader would like to use a static stop-loss. Some Forex traders put a static stop distance on a technical indicator, for example, Average True Range. This is beneficial because rather than relying on their judgments, the traders are using real market information to define their stops or limits.

Isolating the concept of pips will not give you a clear picture. One must know about the kind of market that they are trading in. In the above example, we talked about a static stop of 50 pips and a static limit of 100 pips but we don’t know the kind of market that the trader was dealing in. it could be a volatile or a quiet market. The difference is that the 50 pips are not a large move in a volatile market but they are in a quiet market. Additionally, technical indicators like pivot points, price swings, and Average True Range allow a trader to utilize recent information to better devise their risk-management strategies. Therefore, it is imperative that you consider these factors before putting a static stop-loss.

Trailing stop loss

A trailing stop-loss order is an order that is not fixed, static, during the trading period. If traders have bought a security position and the market price rises, the stop price rises by the trail amount, but if the security price falls (BUY order), the stop-loss price doesn’t change.

Trailing stop-loss orders are created to reduce risk and increase profit in the moments when live positions follow the current trend.

How to calculate stop out level

The Stop-loss level in trading usually is calculated based on previous highs and lows, important price levels. Important price levels can be previous high, previous low, Fibonacci levels, pivot points.

Usually, traders find support or resistance levels, or any important levels and then set stop loss, entry point, and target price level using those levels.

Conclusion

Stop-loss is a resourceful tool that traders can use to keep themselves from losing their capital and to manage their risks. It is not possible for anyone to stay glued to the screen and even if you can commit to it, there are various other factors that can work against you. There could be internet problems or you might not be able to reach your broker on time. It is always better to use this tool to eliminate such risks.

Yes, your trading strategy should dictate how you would employ this tool but our recommendation would be to refrain from trading without using a stop-loss, especially if you are a new trader.

Initial and Variation Margin in Trading we analyze when we talk about trading and current positions risks.

What initial and variation margin means in forex trading and CFD trading?

Initial Margin represents the minimum balance that traders need to have in their accounts to open a position in forex trading. Variation Margin or maintenance margin represents additional requirements, unrealized profit (or loss) on open positions or transactions. 

Total Margin = Initial margin + Variation margin

Initial and variation margin in stocks and futures trading

In such cases that you hear of the term initial margin being used, the margin indicates the minimum required amount that must be in the trader’s account for the trader to be permitted to conduct stocks and futures trades. When you hear reference being made to the variation margin, a clearing member provides a margin payment presented to a clearinghouse. The payment is founded on the movements of prices regarding futures contracts possessed by the clearinghouse members.

There is the requirement for the clearinghouse members to make payments of variation margins, which are noted as being paid on the basis that is day to day or that is intraday. This is necessary to engage in the reduction of exposure to the risk of positions that carry high levels of risk, which are held by the clearinghouse. Therefore, conducting members’ requirement to pay variation margins results in the clearinghouse’s empowerment regarding maintaining the level of risk exposure overall at levels that are deemed suitable, so that orderly payments are completed for all those who engage in trading.

There is the requirement for the members of the clearinghouse to make payments of variation margins, which are noted as being paid on a basis that is day to day or that is intraday. This is necessary for the sake of engaging in the reduction of exposure to the risk of positions that carry high levels of risk, which are held by the clearinghouse. Therefore, conducting the requirement of members to pay variation margins results in the empowerment of the clearinghouse in regard to maintaining the level of risk exposure overall at levels that are deemed suitable, so that payments that are orderly are completed for all those who engage in trading.

Usage of variation margin

It is acknowledged that there is the utilization of the variation margin to increase the level of the inflow of the capital that pertains to a margin account to a margin level that has been predetermined. This process is referred to as the maintenance margin. This is a vital element to consider when conducting the calculations about the variation margin. Liquid funds are required to sustain it to allow it to be applied for use in scenarios if there is the experience of losses in the future. This provides the solidified assurance that the clearinghouse will operate smoothly and efficiently.

Variation margin and factors

It is noted that various factors come to influence the variation margin. Such factors are pointed out as the movements of the prices that are anticipated, the established conditions of the market, and the kind of asset. The perception is that the payment of the variation margin is regarded as being required in such cases that the funds held within an account for the trading decrease to a level below the funds desired for the maintenance margin. When there is the requirement to place more funds into the account, this is regarded as a margin call.

What is a clearing member?

When you hear reference being made to a clearing member, this indicates that a brokerage firm engages in conducting the fulfillment of being a member of a self-regulating organization. The brokerage firm is also required to have membership within at least one key stock exchange of the United States. It may hold more than one such membership. There is the comprehension that a primary example of a clearing member is considered a futures broker.

Variation margin and clearinghouse

It is then noted that a clearinghouse is regarded as an organization that functions as an intermediary to assure that the obligations that are outlined for a contract are honored by both parties, which take into inclusion both the buyer and the seller. Hence, the reality is that a clearinghouse may serve in a third party’s role regarding options contracts and futures contracts. Also, the clearing mouse may conduct a wide array of functions, which take into inclusion performing reports for the data of trading, operating settlements for accounts that engage in trading, performing the clearance of trades, conducting the collection of margin payments, and also engaging in the regulation of the provision of instruments that are newly purchased.

Initial and variation margin futures contract conclusion

Give some consideration to the scenario in which a trader purchases a futures contract. For this contract, the margin that is indicated is for five thousand dollars, as this is noted as the minimum amount of capital necessary for the sake of being able to conduct a trade. It is recognized that the maintenance margin may be set at an amount of four thousand dollars. This indicates that in such a case that the balance held in the account decreases to four thousand dollars, the one who is engaging in making trades is obligated to bring the account back up to five thousand dollars. This is related to the fact that the amount in the trader’s account has dropped to an amount that is classified as being not enough.

The differentiation regarding the indicated margin and the maintenance margin, which is noted as being in the amount of one thousand dollars, is recognized as being the variation margin. Therefore, the reality is that the variation margin is considered the portion of the money necessary to assure that the account possesses the minimum required amount to conduct future trades.

Currency abbreviation represents a shortened form of a currency name. Currency has its three-letter acronym or abbreviation.
Usually, money abbreviations or the currency name abbreviation follow ISO international standard – 4217.

Country currency abbreviation rule shows that two letters at the abbreviation start refer to the name of the country, and the third abbreviation letter is the currency name.

In video below we talk about major currency and their abbreviations.

In this table below we can see world currency abbreviations:

Forex trading has picked up pace in the last 10 years. You don’t have to be a traditional investor or trader to step into the Forex trading market. While it is fairly easy to start trading, making a profit is not as straightforward as you might think. You need to understand every pro and con of a currency pair, you need to decide the position that you will be holding, you need to check if Forex trading is legal in your country, and more. But, all the hard work and research will amount to nothing if you do not have a reliable forex broker by your side.

A few years ago we wrote an article on how to find a good forex broker in 17 practical steps. This year we realized that we need to give a simple answer to this question.

Find a Forex broker that you can trust. It is imperative because they will be in control of your monetary investment. What if you have good capital and a plausible trading strategy but your broker is not trustworthy? They can run off with your money, leaving you with nothing but a bruised pocket!

There are three the most important things to consider when traders want to find a good broker: regulation, support, payment options. If traders want to find a good forex broker they will need to analyze the most important broker’s characteristics such as regulation and security of funds. The security of funds and regulation is very often correlated. The greatest security in trading for any trader represents  A-Grade brokers regulation. High reputable brokers are regulated by USA (Commodity Futures Trading Commission CFTC, NFA) – Japan (FSA Japan) – United Kingdom ( Financial Conduct Authority FCA) – Australia (Australian Securities and Investments Commission ASIC) – Singapore (Monetary Authority of Singapore MAS) – Hong Kong ( Securities and Futures Commission SFC) – Switzerland (Financial Services and Markets Authority FSMA) – Germany (Federal Financial Supervisory Authority BaFin).

While all forex brokers offer Metatrader platform these days, payments and support are characteristics that are vital for future cooperation. Regulated and good forex brokers will offer several deposit and withdrawal options and provide fast payments. Good brokers offer live support, efficient ticket systems with fast response in 24 hours.

Some tips on how to get a broker on forex:

1. Know your needs

You can only find a compatible Forex broker when you are aware of your needs. First, you should know how much you will trade. Once you have decided that, assess if you will be comfortable with making big or small moves. By figuring this out, you can make informed choices while selecting a broker. If you believe that you will be capturing small moves by trading a number of times in a day, an ECN broker will be the right choice for you. This type of broker will be a good option for those traders who will be scalping. 

It would also be wise to have a particular number when it comes to investment. If you have a small capital, you will be trading micro-lots. With an investment of $5000, you can shift to the mini-lots. It is not tactful to open a standard account with capital that is less than $50,000. Now, choose a broker that is suitable for your lot size. You must also check the payment and withdrawal options offered by different brokers.

2. What is the broker offer?

By identifying your needs, you would be able to shortlist a few brokers. It’s time to compare the selected brokers. Every broker has a different USP, you need to find the one that will make trading easier for you. If you are a day trader, you won’t be needing a trading desk because there will be no time for back-and-forth communication. Day traders trade directly as making an offer through a trading desk is a time-consuming process and often leads to re-quotes. Thus, you can choose a broker that offers this liberty but this will not be ideal for those who are holding long positions. Such traders will find it extremely difficult to function properly without a capable dealing desk or customer support.

The next and the most important thing that you need to check is if your broker is regulated or not. There are a number of regulating authorities but you should focus on those brokers that are regulated in countries like the U.S.A., Canada, New Zealand, Japan, U.K., and Australia as these countries are deemed to be financially established.

Look for a broker that can offer competitive spreads. You are more likely to get it if you are a day trader. The next checkpoint on the list is the types of accounts that the broker is offering. Having the option of a demo account is major traction for many traders as they get to test the trading platform before investing the real money. You can use this demo account to test other services offered by the broker. For example, you can send numerous emails using the demo account and note the time taken by the customer support in responding. If they are not quick and efficient enough, it would be better to look elsewhere.

3. Look for reliable reviews

A majority of people read reviews before investing in anything. This is a good practice and can save you from making mistakes but when we are talking about brokers, you must know the source of information as well. Never blindly follow anything that you find about the broker if you cannot link it to a credible source. This holds for both positive and negative reviews. Positive reviews can be paid while the negative ones can be fueled by competitors. Rely on your objectivity and authentic published reviews. You can also talk to the other traders and investors who are using the services offered by your shortlisted broker.

4. Do beta testing

The other three points must have helped in eliminating a lot of brokers from your list. Now, instead of relying on someone else’s opinion, you can test the remaining brokers yourself. The best way to check if the broker delivers what they promise is by using the demo account offered by them. Once you have opened a demo account, start trading. Since these are dummy trades, you will not be losing any real money. Check if the spreads are tight and the trades are being executed instantly. You must also see how good is the trading platform. Is it constantly crashing? Are there glitches? If the trading platform is not fast enough, you can miss many opportunities in the future. 

Test out the demo account for a couple of weeks and then open a live account. Do not invest more than 10% of your capital at this time. Don’t forget that you are still testing the broker. Trade with this amount for a couple of weeks and keep posing questions to customer support. Check how quickly they respond to your queries.

The next crucial factor to check is the withdrawal time. After trading for at least two weeks, you must initiate a withdrawal. You might have to pay a small fee for it. The ideal time for this transaction should be 2-3 days. If it is taking longer, it can cause problems in the future with bigger withdrawals.

5. Be wary of bonuses

Always remember that nothing in the Forex market comes for free. There are many brokers that offer bonuses, for example, ‘Get $100 bonus cash when you open a $500 account with us’. They might credit your account with the bonus cash but they will definitely take it back from you in the form of one charge or another. Usually, the trader will get some kind of restriction when he or she can withdrawal money based on trading volume.

Conclusion
Good brokers are regulated, with excellent and efficient payment systems and hard-working support.