Forex Guide Controlling Risk

Forex trading is a 24-hour activity, so how can you protect your positions when you are away from your screen?

There are a variety of automated orders that can be triggered at pre-set exchange rates and that can be deployed to control the downside and consolidate the upside:

Stop loss: An order to close out a position automatically when the bid or offer price touches a given level.

For long positions, you issue a stop loss order below the current exchange rate. If the market price falls through the stop loss trigger rate, then the order will be activated and your long position will be closed out automatically.

If you have a short position, you would set your stop loss above the current rate to be activated when the offer rate touches the trigger level.

A “trailing stop loss” is one that is adjusted behind a position as it moves into profit, to lock in gains.

In volatile markets, it may be impossible to execute stops at the precise limits.

Take profits order (TPO): The opposite of a stop loss. For a short positions the TPO order will be set below the current exchange rate, and vice versa for long positions.

Limit order: A buy or sell order that is activated when the current exchange rate passes through some preset threshold rate. Limit orders can be good for a specified period (e.g. a day, a month) or “good till cancelled”.

One cancels the other (OCO): A combination of a stop loss and a limit order (or two limit orders) at opposite ends of the spread. When one is triggered, the other is terminated.