I am new to this and I’m afraid this question is going to sound ridiculous but I have to make sure that I understand this Stop Loss concept.
I am currently using FXCM which allows me to buy without being forced to make a stop loss. I looked at at the e-Toro website and they make everyone use a stop loss order with each trade. Initially, I could not understand why e-Toro did this. I have been trading the last few weeks, successfully, with the other broker and not using any stop losses.
Only after talking to a customer rep at e-Toro did I realize that my strategy of buying low and hanging on to the currency until the price went higher was a flawed strategy. I thought that as long as I did not sell my order, that I would be safe even if prices went down…because I was taking a long-term view of the trade…and, even if it took a few weeks or months, the price would eventually go back up.
From being a newbie, I did not realize that as my purchased currency pair sat in my account, that as the price goes down…it is counted against the equity in my account!..even though I had no plans on selling it until the prices went higher again.
So my question is this - is the above explanation the reason to place a Stop Loss on all orders? To prevent large losses & a margin call from the broker and ending up with a closed account? What is the recommended Stop Loss - 50 pips? 100 pips?
I just want to make sure I understand this concept because I’ve had beginner’s luck up until now…but it sounds as if I could have lost all my equity very easily (even though I would not have placed a Sell Order) had the prices gone down drastically.
It’s always a good idea to trade with stop losses. Your question is a little more complex. You say you have a long term view where the trading range may put you into a position where your stops will be wide. Part of your trading plan SHOULD include when a trade has gone against you and when to cut your losses based on your strategy. Make sure you don’t confuse the margin you put up front for the initial trade as the maximum amount you can lose. The equity in your account will go down with every position that moves against you. Worst case scenario you could indeed be left with nothing more than your original margin you put up for the trade or possibly worse.
Always, always, always, allllwaaaays use a stop loss! Like you say, if the trade goes against you, your account equity goes down while your trade is open - it doesn’t need to be closed before your broker says you’re out of funds. Unfortunately this catches a lot of new traders out and has blown many thousands of people’s accounts.
You ask where you should place your stop loss. That all depends where your target is and what your strategy says you should do. I always try to place my stoploss behind previous resistance levels or swings as it affords some protection by doing so. But this needs to be weighed against where your profit target is - if your target is 20 pips away and your stop loss is 100 pips, it’s not a trade I’d be interested in.
You need to learn to risk manage properly so that you only ever risk a set percentage of your equity on a given trade. I only ever risk 1% or 2% on a trade and I’d suggest that to start, you do the same.
Checkout the school on this website and pay particular attention to the risk management principles.
I would suggest always using a SL, there’s nothing wrong with moving it up to BE when near your TP or you could look at trailing SL but just make sure you use something
You can invest with a long term outlook without a stoploss, if that is what you want to do… just not using high leverage in forex. That type of strategy, position trading without a net, is better suited to other markets.
You are really new and we all started like this. Just close that account and study more, explaining the concepts of risk will take me months to do and I just can send you back to BP School. But in escense SL it for capital protection, leaving an order with no protection is a very bad idea. The recomendation is never risk more than 1% of your account it means if you have 100 usd and your arder goes to -1 USD you must close it inmediately and for that puspose a SL order will close it automatically for you. DON’T RELY ON “thepricewillcomeback” bias, you will only lose money and will waste time. Keep studying thwe school section and you will understand why.
