What is a Stop Loss?
Forex trading is terribly rapid. In the space of nano-seconds, millions can change hands – this doesn’t just happen once in a while, it happens every day.
Every forex trader knows this, and uses the protection of stop losses so that a major shift in the value of a given currency against expectations doesn’t cost all the money in the account.
Once a trade is set in motion you cannot stop it, except to close the trade. You may not even be able to click the mouse quickly enough to keep from racking up huge losses.
A stop loss closes a trade automatically when the currency falls to given level. Similarly a stop loss can close a trade when a currency rises in value if you have bet on its going lower.
What is a Limit-Order?
A limit order allows an investor to set the minimum or maximum price at which they would like to buy or sell before making a trade.
What is a Take-Profit Order?
A take-profit order allows an investor to set the closing price of a trade before making the trade.
What is a Trailing Stop Loss Order?
A Trailing Stop Loss permits you to protect your account balance while locking in profit.
In a trade that, for example, is long on a certain currency, you may set your stop loss at a certain point. Suppose the currency pair moves higher? The Trailing Stop loss will also move higher, remaining at the distance you specify below the current value of the pair, so that you can protect your account while getting the value of the trade.
Let’s take the example of trade in which USD/JPY starts at 0 (this is hypothetical). You set your Trailing Stop Loss at -150. Now USD/JPY moves up to 200. Your Trailing Stop Loss Moves up to 50. Your profit of 150 is protected by the stop loss. Now the pair moves higher, to 400. Your Trailing Stop Loss moves to 250. Each time your profit is locked in.
Suppose the pair suddenly drops back to 0? Your trade is stopped out at 250, and you have gained 250. But, you must remember that the Trailing Stop Loss will close your trade, regardless of conditions.
This is not always desirable (sometimes, in certain complex trading movements, a move lower is expected followed by a move higher. Using a Trailing Stop Loss bars your access to this kind of trading strategy).