When trading foreign currency without the use of a safety measure, an example of which is a stop loss mechanism, is considered as financial suicide. There are may times that one's financial position would be stopped out and the next day would be a reversal of fortunes. Even with the next day recovery, a loss was already sustained as the position was closed for any further trading.
Aside from a stop loss, there is another better alternative that can be utilized and it is not a novel idea. The relative newness of the concept is its accessibilty to even small investors for use during their trading positions. This system is called forex options (or currency options) and this is a more effective safety net compared to stop-loss mechanism. This is because a stop-loss is often clumsily used in its randomness, turning a trade to a loss with its application. There are only a handful brokers which offer forex options trading to small investors or traders. One such firm is IBTRADE.
Why is a forex option better than a Stop-Loss?
With a foreign currency option, it operates in the same manner as a stop loss. The difference is that the foreign currency option is limited by time, as it does not close the position when the stop-loss price is hit yet still provides financial protection for you. As such, one can wait for a reversal or correction in the market. While the loss is still sustained when the exchange rate falls, in the same way as a stop loss, but allowing the flexibility to earn a profit when the reversal occurs down the road. You can sign up for a free demo with FX options trading platform here.
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