This is one forex trading tip you should always remember: never forget to set a stop loss every time you trade forex. A stop loss is a certain limit set when you open your trade; when the market moves against you and hit the limit, your trade will automatically be closed and you don’t have to worry about losing more in the process.

A stop loss can be used as a form of risk management. A simple rule of thumb is to set the stop loss and target profit at 1 to 2 or 1 to 3 ratio. If your stop loss is 20 pips, then your target profit should be at least 40 pips. Combined with the right forex trading strategy, you will be very profitable and at the same time remain protected from catastrophic losses.

If you use MetaTrader-based trading platform when trading forex, you can also set a trailing stop. With a trailing stop, the stop loss will as you bank pips of profit. For example, you set the initial stop loss at -20 pips with the trailing stop set at 15 pips. If the market moves to your favor by 15 pips, the stop loss will automatically be raised by 15 pips to -5 pips. As the market moves further, the stop loss will be adjusted further, allowing you to secure your profit from the trade.

Always make sure you set a stop loss whenever you trade. There are various advanced usages of this trading tool, but we are going to discuss them some other times.