Tuesday, November 19, 2013

Is your Stop Loss killing your profits?

Since we have a very slow economic news week so far with very little to move the markets either way I thought I will take a few moments in order to cover a topic which many new traders may find very beneficial. It appears that new traders are clueless about how to use a stop loss order properly and follow popular advice which causes them to stop their profits as well.

There is a growing number of new traders who determine a strategy where they are able to generate profits, but never realize them. They get their analysis right, make the right call and end up with loss after loss after loss. The side effects of this are severe and over a longer time period it leads to total loss of the trading account.

In case you belong to this group of new traders who analyzes a currency pair correct, but fails to profit from it then the problem may be located with your stop loss order. You are getting stopped out of a trade and after you closed it successfully for a loss price action turns around and you could have earned money from it.

Somewhere in the moronic forex marketing world the idea was circulated that real traders, regardless if you trade forex or other asset classes, use a stop loss order to protect their account and manage risk. This notion is complete non-sense. For starters only inexperienced and uneducated traders use a stop loss order so they can close a trade for a loss.

Real traders do use a stop loss order, but not to manage risk. A stop loss order is used to close trading positions for profits.

A lot of new traders then are so terrified of trading that they place a stop loss order 20 pips, 30 pips or 50 pips away from their entry and stick to their risk-reward ratio of 2:1. This basically means that if they place their stop loss 30 pips away they will place their take profit 60 pips away. At the end of the day they think they are trading properly.

Those who want to succeed as forex traders need to drop this moronic idea and understand that using a stop loss to close trades for losses is not intelligent risk management. Furthermore, placing a stop loss order very tight to your entry is getting close to gambling and has nothing to do with trading anymore.

Don’t let your fear combine with your stop loss order and kill your profits, learn how to trade properly!

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