Both of these tools require studying and experience. Luckily, we’re about to do that in this guide.
Stop Loss Strategies
Below are five stop-loss strategies you can apply to your trading:
Setting static stops
A static stop is the simplest type of stop-loss you can implement on your trades. It involves a fixed price that you set when entering a trade to automatically sell a security if the price reaches that level. You must manually adjust it to keep it unchanged. Because the stop turns into a market order once the price reaches it, the system cannot guarantee execution at the specified price, and you might receive the next best price. This strategy helps limit potential losses by exiting a trade at a predetermined price point. It is a key component of risk management in trading to protect their capital in case the market moves against their position.
Static stops based on indicators
Some traders take static stops a step further and base the static stop distance on an indicator such as average true range (ATR), which tracks a market’s volatility in a given time period. The primary benefit behind this is that you’re using actual market information to assist in setting your stop level. This is a fixed price point that does not change unless manually adjusted by the trader.Â
Manual trailing stops
If you want the utmost control of your trades, you can manually adjust your stops as the market moves. This is a loss order that is adjusted manually by the trader as the market price moves in a favorable direction. It requires the trader to actively monitor the trade and decide when to move the stop loss level closer to the current market price to lock in profits.
Trailing Stop
This is an automatic order type that locks in profits and limits losses when the trade goes favorably. However, trailing stops are not great in choppy and highly volatile market conditions. Trailing Stops work best in calm conditions when prices are trending gradually. A static stop-loss improves a new trader’s approach, while advanced traders maximize money management with trailing stops. These are stops that’ll be adjusted as the market moves in your favor. The main benefit of using them is that they can further mitigate the downside risk of being incorrect in a trade.
Fixed trailing stops
You can also set trailing stops that adjust incrementally. For example, you can set stops to adjust for every 10-pip movement in your favor. Say you take a long position on EUR/USD when it’s priced at 1.3100 and add an initial stop at 1.3050. The market moves up to 1.3110, and so your stop adjusts to 1.3060 to maintain the 10-pip distance. After another 10-pip movement higher (to 1.3120), your stop will once again adjust another 10 pips to 1.3070. This process will continue until such a time as the market reverses and the stop level is hit or you manually close the trade. Simply put, if the trade goes against you from that point, you will stop yourself out of the trade at 1.3070 instead of the initial level you set at 1.3050, which effectively adjusts your profit potential while capping your losses.
How to Place Stop Loss and Take Profit Levels
Deciding optimal levels for Stop Loss and Take Profit orders remains a challenging aspect of trading. Typically, traders find setting a Stop Loss to be more straightforward, while they may consider determining the appropriate level for a Take Profit order as optional and sometimes unnecessary. For instance, when adhering to market trends, accurately gauging the future intensity of a trend is often elusive. Traders, in such scenarios, enter the market, establish a Stop Loss to manage potential losses, and ride the trend for as long as its momentum persists. Conversely, there are traders who consistently employ Take Profit orders as a proactive strategy in their trading approach.
Support and resistance levels
Traders analyze charts to pinpoint regions of resistance and support, anticipating potential price reversals. When a price nears a specific level and is unable to surpass it, a significant level is recognized. Traders interpret this level as either support or resistance, depending on the direction of the price movement.
Fibonacci Retracement
Traders use the Fibonacci retracement tool to find spots where the price could turn around. It’s based on Fibonacci numbers, and traders use these levels to set Stop Loss (SL) and Take Profit (TP) orders.
Trendlines
Trendlines play a significant role in determining stop loss and take profit targets. Traders position trendlines at the high points of price swings to better visualize potential price ranges. SL and TP orders are placed below or over the trendlines depending on the price direction.Â
Fundamental factors
Economic and political events can cause significant price swings on the market triggering stop loss orders. Which is why many traders check the economic calendar and closely monitor political news to avoid placing orders before and during such events.Â
Stop loss and Take profit placement is an individual decision, depending on the situation, the basic idea is to place them in a way that maximizes winnings, and limits losses.
Precision in adjusting Stop Loss and Take Profit orders requires a level of skill that distinguishes seasoned traders. This decision, ideally, should be a calculated move within the framework of a well-defined trading strategy rather than a spontaneous action.
Frequently asked Questions(FAQs)
1. What are stop losses?
Stop losses are exit orders that is a risk management tool used to limit potential losses when trading. Stop losses are orders that automatically close a position if it hits a specified price worse than the current market price. Stop-loss orders are an essential tool to help minimize your losses if a price moves against you. If there is a buy signal (long position), a stop loss will close it if the price falls below a particular level, lower than the opening price.
Stop-loss orders enable you to set a predetermined exit point on a trade in order to limit your loss.
2. How does stop loss/take profit benefit my trading?
- Stop-loss prevents you from losing too much of your investment in one trade. Take profit helps you to lock-in what you’ve already earned.
- It helps you protect your capital, minimize losses, and ensure that you capture profits in a disciplined manner.
- They benefit you because the market is very unpredictable. At one moment everything could be going very well, and at another, it could start falling without any reason.
3. Can I cancel these orders?
Of course, you can cancel stop loss and take profit orders before they are triggered. To cancel a stop loss or take profit order, find and cancel it through your trading platform. Regularly monitor your trades and adjust orders as market conditions or your strategy change.
4. Do these orders cost anything?
Stop loss and take profit orders typically do not have an additional cost associated with them on most trading platforms. They are part of tools provided by the platform to help you manage your trades effectively. However its always a good idea to confirm if there are any fees or charges related to using these order.
5. What are the risks of setting Stop Loss and Take Profit levels too tight?
Setting stop loss and take profit levels too tight can have certain risks associated with it. If your stop loss is too close to your entry, market fluctuations might close your trade prematurely, even if it later moves in your favor. This could result in missed opportunities for profit. Similarly, if your take profit level is too tight, you may exit a trade too early before it has reached its full potential, limiting your profit potential. Balance is key when setting levels to protect your capital and profits while allowing for market volatility. Setting them too tight can trigger frequent trades and increase transaction costs. It’s essential to consider your trading strategy, market conditions, and risk tolerance when determining the appropriate levels for your stop loss and take profit orders.
6. What are Take Profits?
Take-profit orders close a position automatically when it hits a better price than the current market price. They can help you to be disciplined with your trading strategy and not chase profits unnecessarily.
Also, take-profit orders are exit orders that you can set to automatically close a position if it reaches a specified price that is better than the underlying market’s current price. They can help you to be disciplined with your trading strategy and not chase profits unnecessarily. A trader simply calculates what is the maximum growth a specific currency pair can have within the next day or even hour, and then sets a take profit order accordingly. Once the exchange rate hits the set amount, the system will close the trade, and the trader will secure the profits.
