By Sean Hyman, Currency Analyst
www.worldcurrencywatch.com

In my experience as both a Forex instructor and trader, I’ve found that currency beginners also have trouble placing stop-losses (aka “stops”) on their accounts.

Newbie investors either think they don’t need stop-losses (BIG MISTAKE), or they’re not sure where to place them.

So let’s clear up all these misconceptions right now, shall we?

First of all, yes stop-losses are vital for any Forex trade. Stop-losses are literally your portfolio’s saving grace. It’s your insurance policy to protect your account from volatility in the markets. In other words, it’s the only thing that can protect your earnings when the markets turn against you.

What’s a Stop-Loss Again?

A stop-loss is simply a mental or technical level in your trade where you automatically cash out your position to protect what’s left of your earnings. Usually, you use stop-losses to protect your account when a particular trade goes against you.

From a logistical standpoint: If you’re buying a particular currency pair, then you place the stop-loss below your entry level, because your protecting yourself just in case your pair drops in price.

If you’re selling-short a particular pair, you set stop-losses above the entry point, because you’re betting your pair will fall in price. If it rises instead of falls, then your stop-loss protects you. 

Let me say again: You always want to place a stop-loss. If you don’t, it’s the same as risking 100% of your account balance on each and every trade. And guess what? If you continually risk 100% of your account on every trade, eventually one trade will wipe out your account (even the Forex pros pick a losing trade every once in a while).