Forex trading is a very profitable and lucrative investment option.But it is also a very risky investment alternative. For people who do not exactly know what they are doing, the advantages of investing in currency trading may lure many individuals to invest their hard-earned money on forex trading, only to find out eventually that things are not as simple and easy as they have thought it to be.
While it is true that forex trading can give an investor huge amounts of profits in a short span of time, there are accompanying risks involved. As any investor would know, high yielding investment alternative normally carry with them a corresponding high amount of risk involved. And forex trading is no different. The promises of high returns on one’s investment can turn out to be shocking losses for any individual investor who does not fully understand the business of forex.
Trading the forex markets involves leverage. Forex leverage makes it possible for an investor with a relatively small amount of capital to control fund which are usually 100 times the amount which he exposes with his trades. Leverage multiplies the effects of the changes in the prices of currency pairs that investors trade.
This characteristic of forex trading should warn investors that, just as profits can be quick and easy to come by with trading, losses can just be as easily absorbed, with the same amount of swiftness and magnitude.
That is why trading platforms have features to provide extra protection for investors who trade the forex markets. These are called stoploss levels. For every trade that an investor makes with his account, he can set a certain stoploss level where he instructs his broker to close that particular trade should the market go against his position and reach a certain level. This is also called "cutting losses”. Anyone who trades forex knows that no matter how diligently a trader studies the market and prepare his trading plan, losses are bound to occur. It becomes a matter of discipline for a trader to accept losses for a trade that goes against his position in the market.
Stoploss levels guarantee that your account would not be wiped out should the market continue to move against your open position. Stoploss levels give a trader the chance to cut his losses. And stoploss levels provide the opportunity to have a fresh new mindset when analyzing the forex market. Sometimes, this is what a trader needs to be able to clear his mind from losses. Cutting losses stops an investor from hoping that the market would reverse itself and follow the investor’s open position. Most of the time, it is that false hope that wipes out the entire account of a stubborn forex trader.
So while stoploss levels effectively reduce an investor’s equity everytime it is triggered, the benefits of using it to ensure that you can survive to open another trade with a fresh new mindset should be emphasized. Use stoploss levels to reduce the risks of an investment which is characteristically risky in the first place.
