The basic working principle of forex trading is hitched on the virtue of its market volatility. This principle is what traders use to speculate and benefit from forex price fluctuations. The idea is to always strive to buy a certain currency at a low price and sell it at a high price. There are however situations when this volatility can work against you, this essentially happens when forex price of a certain currency pair (Selling price) moves lower than your buying price. Such moves could drive you into serious losses; it is even much worse if you don’t have risk management measures or tools to cushion you against this.
Risk management is therefore inevitable even for the most experienced forex traders. As a forex trader, you can always increase your chances of making profits and reducing loses by practicing the following;
· Research trading strategies that work for you and stick to your trading plan
· Make sure your understand the risks that comes with leverage forex trading
· Understand when to close up a trade and cut your losses
· Use risk management tools such as Closing Orders.
· Use technical and fundamental analysis
· Update yourself regularly with current affairs and market conditions.
When it comes to using Closing Orders to manage your positions and keep your forex trading risks low; trust eToro Index. There are basically two types of closing orders involved; Stop orders and Limit orders.
Stop orders of your current trades
eToro Index offers Stop Loss Orders across all its forex trading markets, free of charge. Stop Orders essentially help you minimize losses by closing out an existing trade if the market price moves to a far much lower level than the entry level. The Stop Order tool therefore cushions you against losses by automatically closing your trade if the market reaches a stop level chosen by you.
A quick example
Lets say you went long EUR/GBP at 0.8860 and you wish to close the order and cut your loses in case the pair trades as low as 0.8780; you need to place your Stop Order at 0.8780, which represents a drop of 80 pips. The interpretation of this is that, should the market go against you, your risk limit is set to just 80 pips.
It is important to note that Stop Loss Orders are not always a full-proof guarantee against forex risks and loses. There are times when your trade could be closed a level different from your stop level. This phenomenon is referred to as market gapping or slippage. Market gapping occurs commonly during extreme market volatility where the market prices ��gap’ between two prices, with no single trade happening in between.
When gapping occurs through your Stop Loss Order level, chances are the closing market price of the trade will be different from your stop level. In such cases, the system will strive to close your trade at the next best available price after the gap. You do not however need to worry so much about market gapping and slippage as this is a very rare occurrence and will rarely bite into your profits.