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Some traders use them, and some traders don’t, but can setting stop losses make you a better trader. I believe they can.

What are stop losses?

Stop losses are pending orders placed in the market, to close a position at a certain price point, if a trade goes against you.

Stop losses are exactly that, they stop you from being exposed to significant losses if you get it wrong.

Many traders do not fully understand when it is safe to enter a trade, so they often get into the market at the wrong time, and a stop loss is used to limit their losses if the trade moves against them.

How are stop losses used by the majority of traders?

The majority of traders to do not have a clear understanding of the market, and are therefore entering trades based on how much they are prepared to lose on a trade, rather than how much they can profit on a trade.

A typical retail trader will set a stop loss of anything from 10 to 30 pips from their entry point, and they will target a risk reward ratio of at least 2 to 1. So their profit target will be anything from 20 to 60 pips.

Now if you are reading this and thinking yes that’s me. That’s what i do, but whether i set a 10 pip stop or a 30 pip stop i always seem to get stopped out, it just takes a bit longer if i use a 30 pip stop.

Why the majority of traders are getting stopped out.

The simple answer is they are entering the market at the wrong time.

Traders that are getting stopped out more often tend to use bigger stop losses to avoid the stop out. But if you do that you have to also use a bigger take profit. So if you are using a 2 to 1, a bigger stop loss will mean a bigger take profit, and if you are targeting a bigger take profit, the sentiment of the market has more time to change, and your trade has less chance of working out.

So how can you avoid being stopped out before your take profit is hit?

The answer for the majority of traders is to trade without stop losses.

This is not the answer. The answer is to enter the market at the correct time. If you do this then the chance of you getting stopped out is greatly reduced, and you are more likely to hit your take profit, and have a successful trade.

Why i prefer to use stop losses.

To benefit from the use of stop losses you first have to learn how to trade, so you are entering the market at the correct time. When you know how to trade, a stop loss is very important because it takes the emotion out of trading.

When you enter a trade with a stop loss, you are limiting your risk, so if you are comfortable with your risk, and your potential reward, then you are trading based on a calculated trading decision, and not on an emotional hunch.

Traders that trade without stop losses are emotional wrecks, as they do not know their potential loss in advance, so they are glued to the chart, hoping and praying that the trade works out before they lose their shirt.

This is not how professional traders trade. Professional traders take calculated risks based on high probability. They set a stop loss, and a take profit that they are comfortable with, and they move on to another opportunity.

Set and forget.

Although i am not a great fan of set and forget, it does take a lot of the emotion out of trading. I tend to use a set and monitor strategy, rather than a set and forget. The market is constantly changing and i believe that you have to monitor your trades as the market changes. You may need to tweak your stop a little, or your take profit, to maximize your potential reward, and limit your potential risk.

Setting stop losses will help you to become a better trader in many ways.

Setting stop losses takes the emotion out or trading.
Setting stop losses enables you to set and forget. Or as i prefer set and monitor.
Setting stop losses helps you to protect your trading capital.
Setting stop losses means you can move onto new trading opportunities, and not sit glued to the chart all day.
Setting stop losses gives you you life back. If you want to go for a walk, or go and grab some lunch you can do, because you have the protection of a stop loss, and you are comfortable with your risk.

The most important thing to take from this article is stop losses will only work if you are entering and exiting the market at the correct time, and that is the holy grail of Forex trading in my opinion.

Guest post by professional Forex trader and mentor Rob Taylor of http://www.tradeforexmakemoney.co.uk