A lot of the Forex traders will end up failing when trading and most of them do not understand why this happens. You should know that one of the reasons why a trader fails in Forex trading is the fact that they do not know how to accept loses. The good traders will understand that they will also lose money and they will use money management in order to make sure that they do not lose all of the investment money. This allows them to have a much higher chance to make a profit. Remember that the Forex market brings in high volatility and brokers use leverage. This means that you can easily lose all your money if you are not attentive.
Stops can be defined as values that are set below an initial currency buying price. In the event that the market will fall, all the currencies will be sold automatically when the Stop point is reached. It is the responsibility of the trader to choose the stop points and he/she will do so based on how much risk is accepted. Traders are always protected from huge losses when using Stop Points.
Why Use Forex Stop Points?
There are two main benefits of using Stop Points.
1. Limit Losses – By using stop points you can make sure that when you lose money you are not going to lose a big amount. You are no longer afraid of trading and you are not going to lose focus, thus making bad decisions. In the event that you see the market falling and all the currencies are faced with problems we are going to see good trends soon. This is what we tend to believe. The problem is that this is not necessarily true. Many ended up losing money because they thought that the market is going to show an upward trend after a downward trend. If they would have used Stop points this wouldn’t have happened.
2. Losses Can Bring in Profits – It does sound weird but this can be achieved. Let us think about a stop loss that we set at 5% and let us say that our buy is of $10,000. If the market goes up we might end up with an amount of $12,000. Now our stop limit will go to 5% of $12,000 and the stop limit will become $11,400. Now when the market falls we still end up with a profit of $1,400.
Conservative Forex traders will always use stop points while the aggressive traders are going to focus on analysis and feelings to limit losses.