What Is A Stop Loss In Forex

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What Is A Stop Loss In Forex

Beginner traders are not interested in whether the current market price is optimal. This often leads to increased risk and reduced profits. This is why experienced traders use pending orders. In this article I will go into the details of this tool. We analyze the features of different types of order execution and when to use them.

Stop Loss Orders On Forex Trades, How And Where To Place Them

For those who are just starting out in stock trading, I will first explain what an order is on the stock market. It is important to understand this before we proceed. Order – A market, limit or stop order – is an instruction to buy or sell an asset.

It is done under predetermined conditions. For example, when the asset reaches a certain price, it opens a buy position (buy limit, sell limit, buy stop, sell stop, stop limit).

Market orders are used to immediately open a position at the current price. They are also often used in high frequency trading. Pending orders, such as sell limits or stop limits, are for more experienced traders. Such orders allow you to enter the market at the most suitable prices and you do not have to be at the computer all the time.

The graphic above shows all the options for pending orders and how to apply them. We will talk more about each type below.

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To use orders correctly, you need to learn once and for all what a forex order is. In short, it is an order to perform a specific action – buy or sell an asset. Depending on the order type, it can be executed immediately or when the merchant’s conditions are met.

Let’s look at the simplest orders. What is sale and purchase? A buy order at the current price (buy market) is placed when the trader anticipates further growth of the asset. It expires immediately at the current market price plus the spread.

The yellow line on the line shows the EURUSD market price. The buy order itself is slightly higher due to the spread (blue line). The green arrow shows the expected price direction. A market order is placed when it is possible to make a decent profit and use the opportunity to open an immediate position based on current market conditions.

A pending order is a market order that is filled when the market meets certain conditions. For example, a trader does not want to waste time opening a buy position. Instead, they can place a pending order that automatically starts at the desired price. The difference between market and pending orders is how they are executed. The first is executed immediately, while the second – under certain conditions.

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What is stop buying and how do you use it? This order involves buying at a higher price in an uptrend.

In the graph, the yellow line shows the market value of EURUSD. During the market consolidation, it is not clear whether the price will continue to rise. We believe there will be a bullish signal when the market reaches the blue line, so we place a buy stop order to open a buy position here.

A buy limit order is initiated after a decline in value, a local breakout of the low, and a reversal to the reverse. After crossing the designated level, we enter the market.

To fully understand a buy limit and a buy stop, you need to see the difference between them. A buy stop order is opened with the assumption that the trend will continue. A limit order is used when you expect a quick trend reversal.

Forex: Money Management Matters

The figure above shows how a Pending Buy Limit Order works. When the order is created, the price is on the yellow line. Meanwhile, the trader believes that the downtrend will soon turn into an uptrend. To enter a buy position at a suitable price, they set the buy limit on the blue line. But there is a risk that the market will not reverse at the expected level, but will continue. The chart above shows that this level was not the best to buy and the EURUSD price fell even lower before rising.

Let’s look at that. A trader wants to buy Apple stock at $115 per share. However, the asset is currently at $120.70. Which orders should be placed: limit order, market order, take profit or stop limit? Or is the simplest shopping mall enough?

A suitable solution would be to place a limit buy order. To execute this order, the price must fall to $115 or less. For the trade to be profitable, the price must be above the opening level of the position.

EURUSD pair in forex: the yellow line shows where the trader is at the moment. They assume that the price will not rise above the green line and there will be a pullback to the blue line. This is where they open a long position. Which measure is more appropriate? As you can guess, this is the buy stop limit. This arrangement combines stop and limit positions. It consists of two prices: stop prices (triggers) and limit prices. A limit order is created when the price reaches the trigger level. As soon as the chart reaches the limit, a long position is automatically opened.

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Trading becomes much easier when you know what a stop is. However, the buy stop limit can be used for a reversal scenario as well as for breaking key levels. The trader only needs to place a limit order at a level below the stop price.

Buy/sell stops follow the same concept. But with selling the current market position is above the key level, expect a bearish breakout.

The image above shows that a trader is anticipating a bearish trend. But due to a flat on the yellow line, they follow the scenario of breaking the key level on the blue line instead of reaching the market. The trader believes that since the market has reached this level, it will continue to decline.

Now you can probably tell what a custom scenario is shown in the diagram above. Judging by the trader’s expectations of entering a sell position at higher levels, this is a sell limit.

A Logical Method Of Stop Placement

The difference between sell limit/sell stop and buy limit/buy stop is clear. They follow the same concept but work in different directions. The first two are used for falling markets and the rest are used for rising markets.

We have covered the purchase limit. The sell stop limit in every market follows the same logic. But this order serves to enter a short position. The above diagram shows a common scenario. The trader trades BTCUSD on the yellow line and expects the price to stay below $10,000 and experience a pullback from that level. They place a stop order at USD 10,000 (green line) and when it is crossed, a pending sell order is placed on the blue line.

Why not get $10,000 short with a simple sell limit order? These are the risks. There is a risk that the price will continue to rise after entering a sell position. A sell stop eliminates risk because market entry occurs after a pullback.

To be fair, examples of sell limit orders and buy stop orders are just a few of the many variations. A stop order position can be placed anywhere – both above and below the market and on orders. The stop level is only an additional condition for placing pending buy or sell orders.

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Now it’s time to examine how buy stops and buy limits differ. The difference between a buy stop and buy limit revolves around price movement. Knowing what a buy stop is, we create a scenario where:

A buy limit order is used when we expect a bullish reversal or a reversal of a bearish trend.

Based on how these orders work, a buy limit is placed below the market and a buy stop is placed above.

Here is a simple example. Let’s say Google stock is trading at $1,800. The trader expects a downward correction from the current levels, but sees the potential for safety and starts looking for good levels to maximize profits.

What Is Stop Loss In Forex Trading

Wasting no time, they set a buy limit at $1,720. This is where the trader expects the correction to end.

A stop loss and profit order is given to the broker to close the trade automatically when the price reaches a certain level. Read more about why traders need it in the article Stop Loss and Take Profit in Forex.

For some reason, beginners often confuse Take Profit with Stop Limit. In fact, they are applied very differently and serve different purposes. So, now we will take a closer look.

This order locks in profit when the price reaches a certain level.

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