Anytime that you are investing in the Forex market, you are going into the Market blind. You dont know what point of the investing trend you are entering in at. You might be investing in a Forex stock just before the trend changes. Smart investing means you need to protect your trading float and set up a stop loss. This needs to be done before you enter a trade, so that there is no room for error, or last minute indecision. A stop loss is simply a predefined point at which you exit the stock.

Effectively, its like drawing a line in the sand underneath the share price, saying, If the share price falls below this line, then the stock hasnt done what I thought it was going to do, and Ill exit the position.

This allows you to protect your investing trading plan, because it cuts your losses short, and guards against an all too human tendency to want to believe you must be right.

95% of investing in an entry Forex position means you are expecting to profit from the trade. If, however, the share-investing price goes against you, you might feel the need to justify why you bought the stock by holding onto it until it turns a profit. You might have heard the idea that all big investing losses once started as small losses. Well, while the share price continues to go in the wrong direction, those losses grow in lockstep. This is why you need to have a stop loss in place its like having an ejector seat that tells you when to abort the mission.

One of the most common question Im asked when traders are introduced to a stop loss is How wide should I set my stop?

In other words, how much room should I give the stock to move? There are no definitive answers to this question because it depends on what time frame youre investing in. If youre a shorter-term investing trader, youre going to have a stop loss thats set closer to the share price. If youre a longer-term investing trader, youll give the share price a little bit more room to move and set your stop loss lower.

Once youve identified what time frame youre looking at trading, you need to be able to remove the normal market noise (volatility) in that particular time frame. You dont want to have to close out of an investing position just because a share price moved a little bit due to its normal trading volatility.

In fact, there are some serious drawbacks to setting tight stops.

First, youll decrease the reliability of your system because you get stopped out more often.

Second, and probably a little bit more importantly, you dramatically increase your transaction costs, because youre trading transaction costs make up a major proportion of your business expenses.

To give yourself a fighting chance, you want to trade a system that doesnt chew through excessive brokerage fees. This is one of the major reasons I steer my clients into developing a trading system that runs over a slightly longer time frame. With the correct system in place, and your investing risk minimized, you are well positioned to maximize your trading profits.