Forex: Online Trading Safety: Why Some Trading Experts Risk
Their Own Money When Teaching This Impor
Remember this important online trading safety tip: The markets
will not keep your money safe. Though this is a well known fact,
many people find it quite hard to understand. They believe that,
no matter what, the market and GOOD FOREX will ALWAYS COME BACK,
as though this were a law.
But, there`s no such law. A good online trading safety tips is
to remember that forex don`t always come back, and neither do
markets. If you want to think about the market in terms of laws
of nature, the best one is the law of gravity, specifically:
++ What goes up must come down.
This is especially true for forex and sectors that have risen
extremely quickly. You can protect your capital and your profits
from this natural market law by setting stops.
A stop is an order you place to sell or buy a position you own
if it hits a specified price. It`s called a stop because it
stops you from losing any more money on the position. If you`ve
sold short, you can place a stop order to buy to cover if the
stock rises to a specified price. Stops are not complicated to
use, and they are an integral part of trading success.
When we use the word STOP, we`re referring to a stop loss order.
This is an order that directs your broker to sell a position you
hold if the stock drops to a specified price. If you`ve sold
short, you can place a stop loss buy to cover order to get out
of the position if it rises to a specified price. Once the stop
is triggered, it`s immediately executed as a market order.
Here`s an online trading safety example. Let`s say you buy a
stock at 50 dollars a share. You have reason to think it will
rise, but you also realize it`s a risky trade. You know that if
the stock drops below 48.50, it means there`s trouble with the
trade and you`ll want out. So, after buying the stock, you place
another order: a stop sell order at 48.40.
This tells the broker that if there is market action at 48.40,
or below, to sell your shares immediately in the form of a
market order. They`ll be sold at the current bid, whatever that
is. This will happen automatically, so you won`t have to watch
the stock closely. It also means you won`t be tempted to hold on
longer, hoping that the stock will go back up.
In general, there are two types of stop orders: stop loss and
stop limit. However, some brokers use slightly different names
for various order types, and may not offer all order types to
their clients. I`ve already described the stop loss order.
A stop limit order is an order to sell a position at a specific
price and no lower than that price, if the stock drops to that
price or to buy to cover a stock sold short at a specific price
and no higher than that price if it rises to that price. Once
the stop is triggered, the order is executed only if it can be
executed at the limit price or better, it becomes a limit order.
In my opinion, you shouldn`t use stop limit orders, it
needlessly increases your risk. If a stock`s price is dropping
fast, chances are good that a stop limit order won`t execute at
all.
Let`s say the stock from the earlier example does drop. It hits
48.40, and the stop is triggered. The stop order becomes a
market order to sell. This means that it will execute
immediately at the current bid price. The same principles apply
to stops on short positions. If you sell a stock short at 13
dollars, expecting it to go down, you should place a buy to
cover order at, say, 13.75. If the stock suddenly rises sharply,
you`re protected and you can always re short the stock at its
peak price later.
Let`s go back to the stock the trader bought for 50 dollars. If
the stock is falling slowly, the market order may execute at
48.40, slightly lower, or even, occasionally, slightly higher.
If it`s falling quickly, it could execute a little below 48.40.
If the stock is falling very quickly, it could execute well
below 48.40.
The possibility that they could be stopped out of a position far
below the trigger price is one reason traders may avoid using
stops. Although this could happen, it`s better than the
alternative, to keep holding the position while it goes even
lower. Besides, in most cases the position will be stopped out
quite near the trigger price. In addition to fearing a bad
execution price, some people are afraid that the position will
start to go back up immediately after their stop sell order`s
been executed.
A stock may occasionally bounce right at the point where you set
your stop, as a random occurrence. But, the smart trader weighs
this rare frustration against all the times he`ll save much more
money by using stops to get out of losing positions. Think of it
as the cost of insurance. Just don`t forget this last online
trading safety tip; using stops as insurance will occasionally
cost you a little, but it will save you many times more in the
long run, and you don`t often get a chance to insure against a
law of nature.