Limit Loss Orders, Top 5 Strategies in Setting Your Limit Loss Orders

All financial markets are subjected to a few constant changes and intermittent fluctuations that influence the trade greatly at the end of the day. The Foreign Exchange Market is not an excemption. This is why every trader should know every available meanseverything to immediately and efficiently manage their transactions and keep their losses at the minimum.

There will be losses, it’s impossible not to incur them when you trade in a financial market, such as Forex. But it will not be pose as a problem as long as it doesn’t overwhelm the gains of the tradeyour losses are not bigger than your gains when you trade. This is where stop loss orders, also known as limit loss orders come in.

In a nutshell, a limit loss order allows traders to “sell close position for with a loss” at their the price they chooseown price. It is one of the more popular delayed orders that are being used by traders in the Forex Market. Although, there is no such thing as a hard and fast rule when it comes to using the limit loss order in Forex trading, there are in fact a few strategies that can be employed to increase the chances of a more successful, if not profitable currency trade.

1. Be familiar with the nature of a limit loss order.

Always start with the basics. In this caseYou should know, knowing exactly what a limit loss order is: what it can do, and what it is intended for.

In essence, a limit loss order, or a stop loss order, is a form of a delayed order that allows a trader to liquidate his position automatically at a specific price just in case the market goes against his open position. Think of it as an order which basically tells the broker, “When the price drops reaches to X, close my position”.

The limit order is automatically executed by the broker the moment the limit order price is triggeredreached. This delayed order is called a “limit loss order” or a “stop loss order” simply because it limits the loss of a bad trade to a minimum.

2. Be familiar with the current market exchange.

When selling for a losssetting stop loss order, every trader should be familiar with the current trend of the currency market. This is vital in terms of increasing the odds of predicting the market movement more accurately, which would in turn allow the trader to set a more realistic trigger price for the limit loss order.

Scott Owens, in his book The Six Forces of Forex, likens trading in Forex to watching the movement of a school of fish. He then goes on to explain that an observer can only predict the movement of the fishes accurately, whether they would be in a state harmony or chaos, if he’s able to have a better understanding of what the fishes sense every time they move.

Accurately setting the limit loss order price in Forex is not so different. When setting the a trigger price for the limit loss order, traders should first have a better understanding of what actually happens to the market every time a currency peaks or drops.

3. Use the current market exchange rate as a reference point.

In a sense, an extension of the earlier strategy: every trader should always take into account the current market when setting the trigger price for the limit loss order.

Always use the current market to benchmark the value of your limit loss order. This is because financial movement is rarely a result of a one drastic change in the market. It is, in fact, a product of many intermittent fluctuations that simultaneously take place in the economy. Setting the trigger price far off the current market is likely to impair the immediacy and the efficiency of a limit loss order.

However, while benchmarking the limit loss order or using the current market, every trader should be cautious of not setting the trigger price a little too close to the current market price. Limit loss orders should have a trigger price that realistically allows for a profit. Setting the limit loss order too close to the current market price inevitably sells for a loss at the slightest market fluctuation.

4. Know that there are brokers that don’t have delayed orders.

Unlike smaller brokers, most large interbank brokers may not have stop loss orders.

This is primarily because most of these interbank brokers do not have the concept of “opening and closing positions” Without an open position to close; the limit loss order becomes non-existent by default. Most of these large interbank brokers exchange money not for purposes of speculation but for purposes of import and export.

5. If you’reur broker allows it, consider setting a lock on your order.

Simply put, setting a “lock” means placing two opposing orders.

Most of the time, when the market goes against the favour of the trader, the limit loss order is executed and the position is then closed. In any other trade, this would simply mean liquidating a position for a loss, or selling for a loss. However, a trader can neutralize this loss by opening another position in the opposite direction. This, then “locks” the loss because as the loosing position continues to lose, the position in the opposite direction profits and makes the same amount of money. Both positions can be closed at the same time, or one position after another, all depending on the market conditions.

Say, for example, a trader calculates that the price of USD/EUREUR/USD will go up 10 pips and does a buys one lot, however, the price actually goes down 10 pips. Here, the trader can open another position in the sell direction, this way the 10 pips isare “locked”, and the trader doesn’t lose anything. Once the price drops and bottoms out, the sell position can then be closed with a profit. The trader can then wait for the price loss on the first position to return to zero or rise to profit before closing the buy position.

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