In the forex market, there are many opportunities for entry. However, you don’t have enough time to always monitor price movements. Moreover, sitting for hours in front of the computer just to wait for trading signals is very boring and ineffective. Besides, you may be tempted to enter before trading signals appear. To overcome the issues, many traders often use Stop Order facility which is provided by the trading platform. According to Investopedia, traders often enter stop orders to limit losses or to capture profits on price swings.
There are 2 types of Stop Orders, that is Buy Stop and Sell Stop. Buy Stop is where you can buy above the current price (a current price or running price), and sell stop is where you can order below the current price. The minimum level of Buy Stop and Sell Stop levels from the current price is determined by the broker, and usually for each broker is different.
The advantage of using a Stop Order
Confirmation
If you expect the direction of price movement to tend to uptrend after breaking through the resistance level, you can open a Buy Stop order a few pips above that level, and vice versa. But, if you predict the direction of prices will tend to downtrend then you can open a Sell Stop order a few pips below the support level. These resistance and support levels determine the momentum of the next price movement.
By opening a Stop Order you have confirmed your position following the momentum of the price movement that will occur. You can also determine the level of stop loss and targets following the risk/reward ratio that you plan. As long as the order has not been executed, you can change the entry-level or cancel it.
No need to continuously monitor price movements
By using this Stop Order, you do not have to monitor price movements continuously to wait for trading signals. However, this method is only used if you are targeting a breakout condition at the resistance or support levels. If you happen to be trading by relying on a price action setup formation, you should also monitor price movements even if not often, because usually price action traders use high time frames (daily or 4-hour), and valid price action setup formations don’t always occur at the level resistance or support.
Prevent over-trading
By not always monitoring the market you will avoid over-trading due to excessive market analysis. From the experience of traders, over-trading tends to cause losses due to trading signals that are not valid (false signal).
Improve discipline
By opening a Stop Order you are giving the market a chance to work. A Stop Order will get you an entry according to the price level you predicted. Once you are successful with a Stop Order you will tend to use it for the next trade, thereby increasing your discipline in trading.
Read more: Entering a Slow Market Condition, What Should be Done?
