If there’s one thing that’s holy in the Forex market it’s your stop loss. And the reason why so many people lose their shirts trading Forex is that they commit blasphemy and don’t respect the sanctity of the Stop Loss.

It’s not that people don’t set Stop Losses. Most of them do. But they just do it for no apparent reason because once the tide turns against them on a specific trade they go ahead and change the Stop Loss to allow them to remain in a losing position longer.

For instance, if you go into a buy position you want the price to go up, right? Then you set a SL (which is short for Stop Loss) somewhere below your entry price (no more than 5% less in most short to medium length positions) and then you wait and hope for the best.

What blasphemous traders do is keep looking at the computer screen waiting to see what happens. If the position starts to go against them, they freak out and start “adjusting” their Stop Loss.

Why? They’re afraid of being thrown out of the position and losing some of their money. The believe that as long as their in the position, the tide may change and they’ll eventually profit. What they don’t realize that they’re already losing. It doesn’t matter than they haven’t closed the position yet. Furthermore, they’re going to lose more if the price keeps falling.

You never change your stop loss once you set it up, otherwise it’s pointless to do so in the first place. It’s like having a safety net below you when you jump over a cliff but then lowering it the closer you come to being splattered on the ground. It’s how people lose a lot of money on Forex.

It’s better to cut your losses short and go on seeking a better opportunity than elongating your losses. You may sometimes win with this strategy, but in the long run it’s bad for your bottom line.

Trust me.

The Stop Loss is Holy. Respect it.

by John Drummond

The Forex Resource

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