Many Forex traders think that they are the boss in the Forex market and because of that, they feel invincible after they got a "super lucky big profit" of their first time trading in the Forex market. After that, they would think that "it is better to not have a stop loss as it makes me a loser, I hate to lose!". Well, this kind of mindset is true and it is usually held by beginner Forex traders who see losses as abnormal processes.
After they have applied that kind of mindset into their Forex account they would have a hope that they would get a bigger profit than the first "super lucky big profit". As time goes, it turns out it does not go as expected and then they blow their account as fast as turning the back of the palm of your hand. After that, they realized that they were in the wrong direction and still need to learn more about Forex trading.
From that "super lucky big profit" experience is where beginner Forex traders realized that it is important to set a stop loss as to not repeat the same mistakes they have done in the past to their Forex account. That is why I covered this content to make people who are new to Forex trading avoid that kind of mistake. Below here, you would find why stop loss is really important in Forex which I explained so simply.
Prevent from Getting a Margin Call
This number one reason is crucial to your trading account as it would preserve your money in the Forex account that you have and also it makes you able to survive in the Forex market for a long time as well as to prevent you from what I called The Grim Reaper of Forex traders, that is, margin call where your account is completely dead and it means you could not trade again unless you deposit your precious money into that account again. That is why having a stop loss is important because of this reason.
Could Maximize your Profit
Next, is to maximize your profit-taking in the Forex market. So, why could this stop loss maximize your profit? Well, the answer is simple, because you could limit your loss and move on to another trade so that you would prevent an unproductive trade that you could allocate it into a better trade. I remember when I studied an economy subject when I was a college student, there was a concept called opportunity cost which could be applied to this second reason and related to the previous sentence.
Better Psychology Conditions
Okay, the explanation of this reason would be better if you answer my question. Let me ask you, when you have an open position whether it is long or short and you do not set a stop loss in that position, would you be able to sleep in serenity? I bet most of you would answer no, even if you say yes, then maybe you only risk a really small amount of your money or you have no emotions like a robot. This third reason is really important because when you do not have a good-calm mind then all your rational reasons including your trading plan, strategy, and other important elements in Forex would be eaten away by bad psychology conditions which would then lead to your Forex account into ruin. That is why setting a stop loss in your position is important to make you have better psychology conditions so that you would be able to sleep calmly and prevent your mind from having bad psychology conditions.
Conclusion
So, the conclusion is simply that stop loss is like an umbrella in bad weather in case there is a sudden rain when you travel outside of your house and you already have a safety measure by having an umbrella in your hand. This umbrella analogy could be applied to your Forex account when there is a bad trade you could not prevent, then, a stop loss that acts as an umbrella would protect your Forex account where the protections are divided into three sections. The first one is to prevent you from getting a margin call, then, it also could maximize your profit and the last one is that it makes you have better psychological conditions.
Written by Andre I.
Reference
My experience who have blown away my Forex account in the past many times thinking that I was smarter than the Forex market when the truth is far from it. 😎