Using Protective Stops to Keep Your Forex Trading Account Safe

In the real world, the majority of people protect themselves from losses with insurance. There are two practices in Forex trading, that serve to protect trading accounts from extreme losses. The first is a strategy known as "hedging" and the second involves the use of a currency trading tool, known as a "protective stop". This type of tool is aimed at limiting your potential losses by placing what is called a "stop-loss" or a "stop-limit order".

A stop-limit order, allows the trader to have precise control by designating a certain price at which the trade should be exited. This allows you to keep from going beyond a designated price and being filled at the market price once a move has been completed. A straight stop order is based on the closing the trade at the market price as soon as possible which may cause your losses to be higher than expected.

Most Forex trading accounts work on what is called immediate fill, which means that orders are placed and executed as soon as they are placed and in the order that they are received. In extremely volatile markets this may mean that your trade is not executed immediately even when you have a stop order in place. This is one of the reasons to ensure that protective stops are in place but also to avoid times of extreme movement in the market. Financial announcements are just one example of a time when the market is extremely volatile and moving fast.

Employing a stop-loss means that at a minimum you have begun to observe some money management principles. You are looking out for the amount of money you have at risk and are taking steps to protect it. Trading strategies most often tell you to place a stop at a certain point above or below a trade. You, however, as the trader must determine what the appropriate risk that you are willing to accept is and for most traders it is 2% or less of your total trading account. Following this rule will allow you to trade a lot longer and maintain your account while you become a successful trader.

Many trader employ mental stops in the belief that they can control their emotions and do the right thing. But as soon as a price goes through the mental stop almost every trader begins to look for a reason to stay in the trade. They hope to find a place where the trade will make a retracement based on a support or resistance level or perhaps even a Fibonacci retracement. This rarely occurs and the trader has broken a cardinal rule of money management.

In conclusion, it is always easiest to take a loss and then move on than it is to try and hang on to a losing trade in hopes that it will come back. The easiest way to avoid this type of loss is to place your protective stops immediately upon entering a trade. This way, if you have done your work, then the trade will either be successful for you or you will be out of it and moving onto the next trade, with your account and your sanity still intact.

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