In lesson 7, we showed you some practical operations on Forex, highlighting the effects of leverage which allows us to negotiate on a quantity of securities higher than what we can actually afford. This element makes online Forex trading much more interesting, exciting, and productive.
Results are immediately tangible for all types of users. Regardless of whether you’re investing a little or a lot, the potential earnings in percentage on the Forex are absolutely relevant and can be appreciated from the very first transaction. In any case, to operate safely, there are two modes: demo or real with stop.
Forex Safety: Stops
We’ve already mentioned stops (stop limit and stop loss) in the previous lesson but did not discuss them at length. In this lesson, therefore, we will explain what Forex stops are and what they’re purpose is. Whether you trade on currencies, stocks, commodities, ETFs, or indices, stops will always be available to make your trading more secure.
What is a stop loss? What is a stop limit or take profit?
Let’s get to the point: what are stops?
“Stop” is a mechanism that signals the trading software to stop in order to put an end to losses or gains. Let’s explain it better:
- By setting a Stop Loss you can set a quota on which you do not want your invested asset (currency pair) to fall below. For example, if you invest on the EUR/USD while it is at 1.300 and want to protect yourself if it falls too low, you could set a Stop Loss at 1.2900, so that if the currency drops lower than that, the position is closed instantly and then sold. This operation could save you if there are any sudden drops.
- By setting a Stop Limit you can set a quota with which you “settle” to sell in order to profit. For example, also taking the EUR/USD at 1.300 (share at which you buy) as an example, you could set a Stop Limit at 1.320 which allows you to profit by 20 pips multiplied by the amount invested.
As you well understand, these are two fundamental operations, both in terms of risk management and revenue management. These are two examples of automated trading functions that allow you to be safe even if you can not follow your operations personally and constantly.
The Demo Account
If we talk about security, we can’t fail to mention the demo account. It is a fundamental component in learning since the demo Forex account allows you to put your strategies into practice to check their effectiveness. The free demo account is definitely the best method for testing out systems and techniques in online trading.
Go to the next lesson – Timetables of Forex Markets