Stop-Loss Forex Orders: Hard, Trailing, and Guaranteed Stops

Every trader has had to struggle with monetary loss at some point, and while none of us have complete control over how steep our losses will be, stop loss forex strategy help us to at least contain the damages. You will stay safe from a full-account wipeout if you employ stop-loss orders.

When trading forex, you know how quickly the market can move. You can face a loss in the blink of an eye. Set a stop-loss with your broker, and they will automatically execute the sell order if the price swings to your stop-loss level. You won’t have to constantly check the charts to monitor for an adverse price movement. Your order watch will do that for you.

A common misconception is that there is only one stop-loss type. That is not the case. Each type fits each individual trader’s style, so let’s learn more.

What are Hard Stops?

A hard stop is when a trader sets a trade to close when a market reaches a certain price. The price of the trade will not change from that set price unless the trader changes that price.

Imagine you purchase a stock at $50 and set a hard stop at $45. If the stock’s price falls to $45, your position will close at a loss of $5 per share. Beyond this loss, you will not lose any more. This is important because it prevents you from the loss of the stock plummeting further.

Hard stops are suitable if:

• You prefer a definitive risk for each trade.
• You trade on precise technical levels.
• You cannot adjust the stops constantly.

The main drawback is that a hard stop remains static. If the trade goes in your favor, you must manually trail the stop higher to lock in your profits, or risk giving back your gains on a reversal.

What is a Trailing Stop?

A trailing stop adjusts based on the price of the asset. It ensures that the stop is not stagnant and can actively follow the market in your favor. If you set a trailing stop at $5, then if the price increases to $60, the stop would increase to $55. If the price falls under $60, then you can sell at $55.

This stop is great for:

1. Seeing how long you can capitalize on a trend.
2. Avoiding the guesswork on the peak of a price movement.
3. Allowing the market to control your exit based on the pullback depth.

Trailing stop losses can be difficult. The market doesn’t move in a linear way. The market can still make price movements in an unpredictable zig-zag pattern. If you set the stop loss too tight, you may lose a successful trade. If set too wide, you can give back too much profit before the stop loss is triggered.

What Is a Guaranteed Stop Loss?

Guaranteed stop losses mean your trade will close at the exact price you set. This is useful for news events that cause sudden and large price gaps.

With a standard stop loss, high volatility can cause the market to “slip” past your set level. For example, if you set a stop loss at $45 and the price gapped to $40, your stop is set to fill at $40, and your loss just became significantly larger than you intended.

With a guaranteed stop loss, your trade fills at your set price. Some brokers will charge a small fee for this, but so long as your trade is guaranteed to fill at your stop price, the fee stands to be worth it.

It makes the most sense to use a guaranteed stop loss when:

1. You trade news events or earnings.
2. You hold overnight or weekend positions.
3. You trade gaps in the market.

When to Use Each Type of Stop Loss

There are multiple types of stop loss. Knowing which one to use really depends on your trading style.

• A hard stop is useful to define a risk and keeps the trade simple.
• A trailing stop prevents a trade from going too far in the wrong direction.
• Use a guaranteed stop loss to prevent too much risk from news events or too risky market gaps.

Newer traders use a variety of stop-loss options. You can use a hard stop or a trailing stop once the trade is in a favorable position and is no longer at risk. A guaranteed stop loss will protect you from unfavorable news events, and a regular stop loss should be used at all other times.

A Quick Word on Stop Loss Forex Trading

Traders have to manage the risk per trade when using advanced stop-loss strategies. The market is almost always open and constantly trading. Currency is moving multiple times a second. Standard stop-losses can fail during weekend market gaps because they trigger at the next available price. This explains why weekend gap risks demand a guaranteed stop.

In the forex market, trailing stops are often implemented by traders to ensure their trades are not closed prematurely, as prices in the currency market can stay on a trend for long periods of time.

Other traders prefer to use guaranteed stops near pivot points for economic news releases that can help move the market, as forex prices can change within mere seconds.

Conclusion

Stop losses are not meant to help you realize profitable trades. A stop loss helps you prevent one bad, unprofitable trade from completely erasing your trading account. A hard stop helps to predetermine the loss threshold for any one trade. Trailing stops also help to ensure a profit is locked in. Finally, guaranteed stops help provide protection against slippage for sudden, unbuffered price changes.

Traders figure out the same thing every year. It’s important to save your capital more than you need to make every trade. A stop loss, if used properly, makes sure you trade the best. The stop loss protects your capital and ensures that you can keep trading. In the end, the aim is for your winners to outweigh your losers over time which depends more on the size of your wins and losses than on how often you win.