Stop-loss trading is one of the most important tools in trading stock, Forex, commodities, and cryptocurrencies. If you want to have longevity in the markets, then you absolutely need to use a stop-loss trading strategy. Throughout this guide to stop loss trading you will learn how to deal with the fear of losing money in trading by using a stop-loss order.
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When you’re entering into a trade you’re automatically overwhelmed with a lot of negative emotions due to the risk of losing money. It also triggers your receptors in the back of your mind and it throws you out of balance. Stop-loss orders make it easy to avoid the risks of trading psychology and capture your gains.
This, in turn, will eventually lead to bad trading behavior and taking unnecessary losses.
When you trade with a stop-loss order it will bring more composure, rational and peace of mind.
Check some of the most common misconceptions about stop-loss strategies here: Stop Losses – The Ultimate Guide for a Forex Trader.
This complete guide to stop-loss trading orders will also reveal how to use options trading stop loss instead of the traditional SL order.
But let’s first see what is a stop-loss order and how does it work:
What is a Stop-Loss Order
A stop-loss order is a risk management tool designed to close an open position at a predetermined stop-loss price. The stop-loss price is just the price you decide you’re wrong on your trade.
If a stock, for example, costs $100, a trader might issue a stop-loss order at $90. If the stock loses 10 percent of its value, dropping to $90, the stock will automatically be sold. While the trader ends up with a losing position, they avoid losing even more money (exiting before the stock drops to $80).
How to determine the stop loss price?
Regardless of the market traded, the stop-loss price can be determined by employing technical analysis tools such as:
- Support and resistance
- Above and below key price chart patterns
- Pivot points
- Market structure
- Technical indicators
Whenever you buy an instrument, your stop-loss is always placed below the current market price. Inversely, whenever you sell an instrument, your stop-loss is always placed above the current market price.
A stop-loss order is an effective tool that should be part of any risk management trading strategy.
Here is a real-world example of a stop-loss order in action:
For example, if you bought Apple shares and set your stop loss at $225, your order is instructing your broker to sell the stock if the Apple price drops to $220.
Stop Loss trading is like an exit plan. Once a stop-loss order is exercised, you will no longer own the asset you are trading. Using stop-loss orders enables you to control your exact level of exposure to risk.
No wonder many professionals refer to it as stop-loss insurance or an insurance policy.
Trading with a stop loss is mandatory. Without it, your exposure to risk will equal however much the stock is worth.
Stop Loss trading is like managing risk.
It’s no surprise that many billionaire hedge fund managers see themselves first as risk managers and only after that as traders.
If you don’t learn first a good strategy to set your stop loss, you’ll never make it in this business.
Making money in forex is easy; the hardest part is to properly manage risk.
Let’s now see how stop-loss orders work in any market or time frame.
Using stop-loss orders in Forex trading:
How Stop-Loss Order Work – How to Calculate Your Stop-Loss
How to use a stop-loss order? These trading tools are essential for all trading strategies.
A stop-loss order should be established long before you enter into a trade.
This is essential.
Because it can assist you to calculate how much money to risk per trade.
For example, if you know that your SL is 100 pips or 20 ticks below your entry price, you will not want to risk as much capital as if your stop-loss is only 20 pips or 5 ticks below your entry.
The con of using stop losses is when the market suddenly gaps below the stop-loss price. When this happens, you may end up trading below the initial stop-loss order.
This is more common with stock trading.
To avoid gaps, you can use a stop-limit order which guarantees your order to be filled at the stop-limit price.
Now, we’re going to show you how easy stop losses are calculated:
For example, let’s say that you want to buy USD/JPY at an exchange rate of 109.00.
Using technical analysis, you reached the conclusion that an ideal place to hide your stop loss is below the 200-day moving average at 108.60.
You can calculate your stop loss by simply subtracting your stop loss trigger price from your entry price.
Then, our stop loss size is 50 pips (106.00 Entry – 105.50 SL = 50 pips).
Next, you’re going to discover the importance of using a stop-loss order.
Why Having a Stop-Loss Trading Strategy is Important
A stop loss is important because it will protect you from losing more money on your trades. By using a protective stop loss you know in advance how much money you could lose on each trade. This can be extremely helpful in implementing sound risk management strategies.
In this step-by-step guide, you’ll learn how to build a trading risk management strategy.
The main goal is that a stop loss minimizes losses.
Additionally, a stop-loss order can help you hold on your trade longer and grants you more time to profit on a trade.
There is no such thing as the Holy Grail in Forex trading (stock trading, commodity trading, options trading, or cryptocurrency trading).
It’s humanly impossible to win 100% of the time unless you have a time machine.
That’s why you need to master stop loss trading to protect your trades when things go wrong.
For example, the grid trading strategy is a complex system that requires some trading experience. But, even if you’re the most successful trader in the world, to properly manage a multitude of open trade you need to do grid trading with stop loss.
Is your stop always getting hit only for you to see price action reverse and go back in the direction of your original trade?
I’m sure many traders have experienced this. When this is the case, you may want to consider adjusting your current trading strategy.
Do you want some help to prevent your stop from getting hit and improve your trading success?
Below we’re going to share two simple tips for setting stop losses:
Two Tips to Avoid Your Stop-Loss Getting Hit
The stop loss tip number one is to place your entry where you want to place your stop loss
We want to challenge you to try using this stop-loss strategy.
A lot of the times traders lament about their stop loss getting hit and then price immediately reverse to go back in their favor.
How do we avoid that?
The truth about stop-loss nobody told you is simple:
Try reversing the conventional thinking and place your entry where your stop loss originally would have been.
This looks something like this:
Flipping your entry with your stop-loss order is one of our secret stop-loss trading strategies.
By using this stop loss secret, the “new you” will be getting into a trade as the “old you” would have been getting stopped out.
Flipping that psychology and putting your entry where your stop loss originally would have been will give you a much higher success rate in your trades.
More, you’ll start buying at the same time with the professional and smart money that also employs this secret stop loss technique.
Stop-Loss tip number two:
Give your trade room to work in your favor and stop moving your stop loss to break-even (BE).
Did you know that 70% of losses among retail traders are caused by prematurely moving your SL to break-even?
That’s reason enough to stop trailing your stop loss as soon as you see little bits of profits on your open trades.
Here is why this is a smart decision:
By allowing your stop loss to stay unchanged, you can adhere to your trading strategy and see what happens next.
You can enjoy more profits!
Let’s look at some examples of placing strict stop losses.
Don’t expect anything conventional in our approach to stop-loss trading.
We try to challenge conventional wisdom.
Options Trading Stop-Loss
If you want to find amazing trading opportunities that most traders overlook, learn our options trading stop-loss strategy.
This article will cover everything you need to know about call option vs put option: Introduction to Options Trading.
Options are a great alternative to using a stop loss.
Let me explain why:
You can control the risk by opening an option trade either in the underlying instrument you’re trading (for futures) or on other related markets
Options trading has many advantages over a stop-loss order that has many shortcomings.
For example, in fast-moving markets, your stop loss can encounter slippage. Many brokers don’t guarantee stop losses. In essence, this means that they don’t promise you’ll get the desired stop-loss price once triggered.
However, using options instead of stop-loss, you can’t lose more than the strike price.
If you haven’t realized by now, this is similar to hedging strategies.
For example, if you go long crude oil futures at $55.00 and set your stop loss at $54.50 limiting your loss.
But if the next day Crude oil price gaps lower at $54.00, your stop loss trigger price will be $54.00.
This will lead to a bigger loss than you initially anticipated.
So, do you want to know how to set stop loss like a professional trader?
If you buy an option with the strike price at $54.50, instead of a stop loss, you can’t lose more than the strike price.
You have to pay a premium for buying an option.
But, it’s worth paying an extra fee if that’s going to reduce your potential loss.
The good thing is that you can buy out-of-the-money options OTM, which typically are less expensive than in-the-money options ITM.
Usually, hedge fund managers use options like to use a hard stop-loss.
Secondly, between options vs stop loss, options trading allows the trader to better navigate ranging markets.
In consolidation, your stop loss can be easily hit due to a whipsaw or stop hunting activity. If you place the stop at the wrong place it becomes an easy target.
By having options set in place instead of a stop-loss order, you can reduce the negative effect that comes with range trading.
Even in the trading market, an option is a better alternative to a trailing stop loss strategy.
The swing trading stop loss strategies often use a trailing stop that can be easily triggered.
Again, options trading provides a better way to manage your risk and secure in the profits.
Final Words – Stop-Loss Trading
If you fear that your broker hunts your stop loss, this stop-loss trading strategy will prevent that from ever happening again. You can avoid being stopped out of your trades too often by simply following the stop loss trading tips highlighted throughout this stop loss guide. These tips can be applied in every market (stock market, forex, cryptocurrencies, commodities, etc.). The more you practice as a trader, the easier it will be to effectively implement stop-loss orders and other trading mechanisms.
To succeed with options trading stop loss, look at trading the same way as professional traders. Through this stop loss technique, you can better control the risk and protect from volatile markets, ranging markets and fundamental shifts in the supply and demand equation.
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