Forex for Beginners: The Stop-Loss Order

The online forex spot market is a great starting point for a budding currency trader. You can have the advantages of leveraged trading or trading on margin, where you can execute trades in lots of 10,000 to 100,000 for a fraction of the cost. Since a "pip" is only US $1 for every US dollar currency pair, there's no fear of great losses. That is until you get the dreaded "margin call" from your broker. That means your account doesn't have enough money to cover your trades. But you shouldn't have to worry about the dreaded margin call. All you need to do is just set up a simple order, a stop-loss order.

A stop-loss order is a market order type where the currency that you bought will be sold if it falls below a certain value thus keeping you from incurring more losses. This is typical for a long position (when you buy the base currency in anticipation that it'll appreciate) where it will be automatically sold when the market moves against your position.

For example, you bought US dollars at 1.2009 or you're long US dollars at 1.2009. You set up a stop-loss order at 1.1999. When the US dollar drops to 1.1999 or below, it will be sold automatically. Thus minimizing your losses to 10 pips, rather than selling the depreciating currency at a much lower price later on which would have significantly used up your margin or capital.

When set-up, a stop-loss order will remain effective until the long currency is sold or if you cancel it. The value of the stop-loss order is a forex novice's best friend. More often than not, the temptation to keep long with a currency in hopes that it will appreciate soon has been one of the many mistakes that novice traders make. This market order has also protected traders' capitals in more ways than just keeping their accounts active in the currency market.

The stop-loss order brings peace of mind to traders. The dread of getting a margin call will become a non-issue. Budding investors can now concentrate on learning the market and developing strategies to hone their decision-making skills without worrying about losing their capital.

It's also important for every beginner to understand that though the stop-loss order protects their capital while they execute trades, it's more important not to rush into the transactions. Learn to manage your capital as well, by trading one currency pair at a time while you're still getting the hang of things. Use leveraged trading cautiously. With wise decisions, the forex has the potential to making you big bucks for your investment. You can even earn income from the forex for the rest of your life.

For the novice trader, it's fearful that you might unknowingly eat away at your investment with going long and making bad trading decisions. Don't let it happen by setting up a stop-loss order for your trades. This will automatically sell the currency you bought when its value drops in the market, protecting your capital from dwindling down. This is not the time to worry about getting a margin call from your broker. It's the time to learn the ropes, and the time to develop and be steadfast in keeping wise strategies that'll make your forex trades a profitable investment.