A “stop-loss” order is one of the most crucial orders there is in trading. It prevents you from losing more than you should if the trade goes bad.
Let’s say you buy something, anything, and not necessarily currencies, at the price of 10. If you can sell that something at the price of 12 then you make a profit of 2. Are you following? Okay, but what if that something starts to lose value and the price that anyone is willing to buy it now will only be 5? Then you’ve lost 50% of your money.
Well, think of stop losses as a means to get out even before the price drops to a level where you do not want to be. So going back to our example – you buy something at the price of 10, you set a stop-loss order to 9, now if that something starts to drop in value to 5, before it even reaches 5, you will still be able to sell it at 9 with only a small loss of 1 or 10% instead of 5 or 50% Got it?
Now, please read and repeat this line: “An amateur trader thinks about profits, a professional trader thinks about risks.” Would you like to be a professional in this field? Then never trade without stops because the forex market, more than any other market, is a place where volatility, irrationality and downright ugly can last far longer than you and anybody for that matter can remain solvent.
Trading without a stop loss order is like jumping out of an airplane without a parachute and just hoping that you land on a soft patch of hay in the middle of a snow storm (and what are the chances of that happening?)
Here’s another story from another member of the club to illustrate how devastating trading without stops can be. In 2007, a member of ours deposited $9,800 into his trading account. Within 3 short months, he was able to grow this to a whopping $18,000. So he informs me of his good fortune and I congratulate him and tell him that a 100% gain in 3 months is superb, time to withdraw the profits and take the risk off the table. He just looks at me incredulously and asks why he should do that, he’d rather “compound” the money and double it again.
A few days later, he informs me that he was doing very well. So well in fact that he decided to just trade with his gut and without stops! He reasoned that because he was trading with a much bigger volume that placing stops would be counterproductive to his objective of doubling his money. I knew at this point that his ego and greed were making him reckless which we warned him about. But you see, there is only so much advice I can give especially if it will not be heard. A few more days go by and he informs me that his account had dropped to $1,500. Not a pretty story, in fact, it’s downright brutal, and unfortunately it is a very common one.
Mark So is a fervent businessman, forex trader and educator. He is the Chairman and CEO of Businessmaker Academy—a business, finance and corporate training center. He is also the Founder and Chief Forex Trainer of Forex Club Manila and Forex Club Asia. A sought after speaker for business and forex, he is inviting you to attend his 2 hour orientation on Forex Trading for FREE. To register for this please go to www.forexclubmanila.com/forexorient or call (632)6874645. You may email your comments and questions to: firstname.lastname@example.org
Update: You may now reach Mark at his new site //www.forexclubasia.com/