A stop loss is an order placed with a broker to sell a trade when it reaches a certain price. As its name suggests, they’re designed and used to limit a person’s loss. Simon Garner, our UK Trading Floor Manager takes a look at them in more detail in our latest blog.
With the forex market being the largest financial market in the world, and not a single retail trader able to move it in a certain direction, limiting any loss when the market goes against you is an important part of trading.
During the Learn Forex Courses we run, we often ask traders to make two simple promises:
One: Never trade on the 1-minute chart
Two: Never move away or remove a stop loss.
Despite this and our warnings, we still find people can’t control their emotions or impulses and many remove or change their stop losses.
Why do people do this?
It’s human nature, it’s in our phycology. Traders who fall into the trap of removing or moving away from their stop losses often have a strong fear of losing. Perhaps we think we’re good when we win our trades and bad when we lose, or always dreamed of someday living a wealthy and lucrative life, and incurring losses in our trading account seems counterproductive to that dream. Having seen the impact of emotions and trading with our clients, we recently launched a dedicated monthly trading phycology class from the London office as part of one of our courses.
We see everyday so many people doing what they said they would never do. Remove or move away their stop loss.
How do you keep yourself from removing your stop loss?
1.) Humble yourself
You are never going to be right every time and you will never be as big as the market, meaning it is important to accept your losses as they are. The important thing here is to deal with them like you do would a bad days in your life, accept them as they are and move on.
2.) Plan ahead
Entering a trade without a trading plan is like going to war without a weapon. We commonly see traders trying to get into a trade without really knowing what their technical basis or reasons for doing so are. When the market then moves into the other direction, the trader can be caught off guard and the temptation to move their stop loss becomes greater.
Where you have a clear plan, which outlines the reasons and contingency plans for your trade, even before it opens, you are less likely to panic as you will have already anticipated where your trade could go, before it then possibly moves your way.
3.) Make your trades worth your while
Another big factor which breeds the fear of losing is where some traders close trades as soon as they turn green, regardless of the minimal amount that they made, and even though they risked 2% of their account.
By becoming extremely averse to losses and closing trades as soon as it makes any profit, you can find that you need many more wins to make up the amount you lost on just one trade, rather than seeing a trade through and balancing any risk with any opportunity.
You can make your trades more likely to be worthwhile by looking for setups that offer higher reward-to-risk ratios. If your wins (for example $20) are typically double that of your losses (+$10), you’re going to feel less pressure to win every single trade and less likely to move your stop loss because you know that you can easily recover from a loss.
Losses are part of any successful trader’s life. By learning to embrace them you can teach yourself valuable lessons that help shape you as a trader.
Always remember that you cannot control the market, but you can control yourself. Never move away or remove your stop loss.
For more information on our classes and courses please join us at one of our free two hour workshops.
All trading involves risk. Losses may exceed deposits.
The information here has been prepared by Learn to Trade. It is offered as an opinion and should not be considered an offer or solicitation to invest. Whilst the information provided is believed to be accurate at the time of publication, no guarantee is offered on the accuracy or completeness of the information given. Learn to Trade accepts no responsibility for the information and comments. Consequently any person acting on it does so entirely at their own risk.
Simon Garner, Trading Floor Manager