It’s Time to Stop: A Guide to Stop Losses

Setting stop orders isn’t a linear process. In fact, there are many questions concerning how one should exactly place his or her stop loss order Stop Loss Order A stop loss order is an order placed by the trader, to be triggered automatically at a specific price or time.The purpose is averting any further equity losses, should the value of the financial instrument move in an unwanted direction. Traders typically use stop losses as part of a trading strategy, where they have clearly defined profit targets and exit methods. Thus, there are no fixed rules on how or where or when to apply a stop loss order; it is up to the trader to find what stop loss suit A stop loss order is an order placed by the trader, to be triggered automatically at a specific price or time.The purpose is averting any further equity losses, should the value of the financial instrument move in an unwanted direction. Traders typically use stop losses as part of a trading strategy, where they have clearly defined profit targets and exit methods. Thus, there are no fixed rules on how or where or when to apply a stop loss order; it is up to the trader to find what stop loss suit Read this Term and which technique should be followed.

It is no secret that every successful trader will plan every single trade before actually taking it. This means that they will know exactly when to get out when a trade goes against them.

As such, no matter what type of investor you are, stop losses should be too be vital in your strategy because you need to control your both your risk and your losses, especially if you are planning to use leverage.

Even though there isn’t a single approach which could considered to be better than others, it is very important that investors know what options they have on the table and exactly how to use each one of them.

What is a Stop Loss

A stop loss is, in essence, a pre-determined price which an investor sets as an exit position in order to either limit his or her losses or to protect their profits. This means that a stop loss is the exit strategy in your trading plan.

As such, choosing which type of stop loss to use will depend on the overall goals you have set in your trading strategy.

The two most common errors when dealing with stop losses

The first and most common error is not having your stop placement determined before taking a trade. This is also valid for entry and target. By having these set in advance you will remove emotion from your trading decisions as no capital is yet to be on the line because you are still at the crafting stage of your plan.

Arbitrary numbers are also a known error traders make mostly due to the market not really caring about fitting your own framework or your Risk Reward Ratio Risk/Reward Ratio In financial trading, the risk to reward is a ratio that simply compares a trade’s potential risk versus its potential reward. It is used by traders to determine the long-term viability of a trading system. First and foremost, it’s important to note that there is a universally adopted risk/reward ratio. A lot of inexperienced traders often ask the question what risk/reward ratio they should use for their system. This depends on what type of system one is trading. In fact, determining the correc In financial trading, the risk to reward is a ratio that simply compares a trade’s potential risk versus its potential reward. It is used by traders to determine the long-term viability of a trading system. First and foremost, it’s important to note that there is a universally adopted risk/reward ratio. A lot of inexperienced traders often ask the question what risk/reward ratio they should use for their system. This depends on what type of system one is trading. In fact, determining the correc Read this Term. It is you, as a trader, who should adapt to the market’s conditions because those are the ones you have to play with.

Four key strategies you should know

1.Moving averages

Moving averages are a popular tool. They can be easily used to place and manage your stop loss orders.

Usually, traders will use moving average and proceed to placing the stop loss on the opposite side of the current price, meaning that a potential exit might happen once the price breaks the moving average.

It is important to consider that if there is a fast moving average, you will get in and out of trades relatively quickly. As such, a longer moving average will be much better suited for swing trading strategies as you will be able to ride trends much longer.

Adding a volatility stop loss here will greatly improve your strategy as you will understand how close, or how far, you should have set your stop loss to the

moving average, while taking in consideration the current volatility and market context.

2.Swing Points

By identifying the previous swing points on your chart, you can place you can place and manage you stop loss accordingly.

You can place them right below them which, in turn, will give you an exit once the price breaks its typical swing point.

A typical way of looking at these is by checking the previous day’s highs and lows or even the intra-day highs lows.

If you are looking at breakout or range trading, adjust these slightly and cross check them with support and resistance areas.

3.The Fibonacci levels

The Fibonacci stop loss approach offers traders an objective way of placing their stops because of how well defined they are after the Fibonacci levels are drawn.

4.Pivot points

Pivot points offer traders an even more objective strategy simply because traders don’t get to set them.

They adjust daily based on the price action, momentum, and market volatility.

This in turn means that during a stronger trending market, you will see pivot points being set further away as opposed to a low volatility one in which you will see them much closer together.

Pivot points are used much like in the Fibonacci strategy: whenever the price breaks past a certain pivot level, the stop loss is trailed right below it.

Wrapping up

The key to stop losses is arguably technical analysis but as for the right value, it solely comes down to your hopefully back tested strategy, the time frame you set, and what you feel comfortable with.

No single strategy can be considered superior to others but we consider important to get to know the different types of stop losses, their pros, their cons, and how to combine them.