Why is Stop-loss necessary in Forex Trading: A lesson for all South African traders

By: Chime Amara

The Forex Market is a very volatile market. The market volatility in some cases could be so large that losses could exceed one's capital. According to the research carried out by most forex brokers, virtually 65% of Forex traders lose their capital while trading due to market volatility. To guard against this, traders have been provided with the option of using Stop-loss while placing their orders in the market. Stop-loss is the trader's friend as it helps to avoid excessive loss leading to the total loss of one's capital due to market volatility. It is therefore expected that all forex traders must imbibe the practice of using Stop-loss while placing their orders at the market.

What is Stop-loss？

Stop-loss is a pending market order set in the opposite direction of the trader's position and designed to close the trader's open position in cases where the market goes so badly against him. Very often, experts consider the ideal Stop-loss target to be 30 - 50 pips away from the trader's entry position. Setting Stop-loss is the best risk management practice to prevent excessive loss in cases of prolonged one-directional market volatility contrary to the trader's position. It reduces the chances of losing one's capital entirely whenever the market goes wrong.

Advantages of Using Stop-loss

· Helps to avoid excessive loss

· Prevents blowing up of account

· Reduces the trader's anxiety

Disadvantages of using Stop-loss

· The market could easily hit ones Stop-loss and reverse

· Decreases one capital

· Often there could be a deliberate Stop-loss hunt by liquidity providers