Forex Signals

Stop-Loss Orders

It is very difficult to predict currency prices, and so, to prevent major losses, stop-loss orders are set to close a transaction when the losses reach a certain limit. Because stop-loss orders are placed to prevent more losses, they are set on the other side of the limit order to take profits. Thus, a stop-loss order for a purchase transaction is set below the purchase price, and a stop-loss order for a sell short transaction is set above the sell price.

Because of the spread, a stop-loss order for a purchase transaction must be placed below the dealer’s bid quote, which is lower than your purchase price at the time of the transaction. In fact, it should be placed low enough that the random walk of market prices will not trigger your stop-loss order before your limit order. Many traders try to avoid this by not setting a stop-loss order, but this is a mistake. The market could move counter to your expectations for a long time or by a large amount, resulting in very large losses, which are magnified by whatever leverage you are using.

Since currency prices are so unpredictable, it is wise, and most trading platforms allow it, to set both limit and stop-loss orders with the initial order, whether it be a market or an entry limit order.

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