stop loss when trading online

All about Stop Loss

Stop & Loss is essential in learning forex. When you start trading online, the goal is to invest in order to earn as much money as possible. At the same time, we are also afraid of losing money. To achieve these inseparable objectives, different strategies must be put in place. In particular, it is wise to adopt Stop Loss, a strategy to limit losses… How does it work?

Stop Loss

 

Stop Loss (or Stop order or trigger limit order) is a tool dedicated to online trading enthusiasts. As its name suggests, it is used to stop losses. Each trader can then configure this instrument at will: he decides the limit of losses he is ready to endorse in relation to his capital. By adopting Stop Loss, this tool should not be considered as a brake on the trader's development. On the contrary, it's a great way to protect capital, especially when you tend to get carried away by emotions.

 

Place a Stop order

 

A Stop order is placed in order to protect against a possible drop in the value of an asset (whether it is stocks or other financial securities). Thanks to Stop Loss, the trader can set the maximum amount he is willing to lose in the event that the trends do not move in his favour.

In practice, when such an order is placed, an asset is bought or sold automatically when its value has reached a certain limit. In this way, the risk of loss is reduced. Stop Loss is found especially in Forex on all traders like Admirals or eToro for example.

evolve stop loss accorning to the evolution of the price

How to properly use the Stop order?

 

But how then to properly place this type of order and take full advantage of its advantages? This is essential in any learning to trade. It is important to take into account different parameters to make the most of it. First, you have to take into account the volatility of the asset. If the latter fluctuates a lot, you must choose a level far enough from the current price to prevent the Stop order from being triggered too quickly.

It's also a good idea to keep your investment and return goals in mind. Thus, if we discount for example a gain of 25% over a period of 6 months, do not place a Stop order at 3% loss: over 6 months, there is still plenty of time to reach the goal. However, the Stop Loss would be triggered quite quickly. Finally, it is also wise to observe the evolution of the assets in which we are interested. The objective is to analyse their resistance as well as their support. It is therefore recommended to place a Stop Loss rather below a significant support.

Ultimately, Stop Loss saves the trader from having to monitor how his assets are changing on a daily basis. This is particularly interesting if it is impossible to access the online trading account. If you are new to online trading, feel free to use the Stop order on high volatility assets to limit your risk and why not start with eToro by watching the top traders?

stop loss on etoro with our trading platform for beginners

Should we use the stop loss?

 

The Stop Loss is surely essential and indispensable tool trader who applies a healthy money management. We will highlight the advantages and disadvantages of this risk management tool. It is essential that all traders take the time to learn stop loss forex trading. It is also very useful for buying stocks.

5 major advantages of applying a stop loss trading strategy:

  • Placing a stop loss greatly reduces the level of stress and affect linked to trading since this order automatically limits the losses tolerated on the orders placed. The Stop Loss definition is transparent on this point: stop losses. This is the primary and affectless mission of this trading tool;

  • The use of the stop loss makes it possible to optimise the time devoted to trading since the investor is no longer required to stay in front of his screen to see if a position is winning or not, within the set objectives;

  • By definition, it limits the level of capital loss and contributes to sustainable and reasonable money management;

  • Stop Loss is an excellent performance indicator. If the set price is hit, the trade is considered losing. On 100 trades, if the price level of the stop loss is hit less than half, we can consider that the strategy applied is effective;

  • This type of order is part of the free package of all platforms and online brokers combined. For example, in CFD trading at eToro or XTB; in cryptocurrency trading with the Binance stop loss or the Kraken stop loss; in stock brokerage with the DEGIRO stop loss or the Bourse Direct stop loss.

ADVANTAGES OF THE STOP LOSS ORDER

Despite all its advantages and its obvious interest in a trading strategy, the stop loss order is not exempt from some disadvantages:

  • Placing stops losses is not a guarantee against potential gaps (significant distance) between the closing and opening prices of the financial markets;

  • The use of the stop loss can lead to repetitive position closings while the trader is in the correct trend;

  • The stop loss sometimes pays off with some brokers.

ADVANTAGES OF THE STOP LOSS ORDER

Common stop loss mistakes

What are the most common mistakes traders make when using stop loss? We will give some examples to avoid repeating identical scenarios.

 

Examples of stop loss errors

  1. Do not determine the stop level upstream. This is certainly the most common mistake among novice traders who have not yet realised the importance of their money management. Hence the importance of properly calculating your stops losses and take profits before placing an order. Imagine the price of the EUR / USD pair (forex market) with an entry level of 1.29000. By performing the appropriate calculation, we can define that a stop limit 20 pips below (i.e. a closing price of 1.2980), with a pip at €1, is equivalent to a loss of an amount of € 20. This point value depends on the number of lots. MetaTrader offers a free tool to refine this calculation and the price of losses. In a short position, the distance of 20 pips is located above the entry price (ie 1.3100);
     

  2. Place the order randomly. It is essential to define the point of invalidation in your trading strategy. From the latter, an investor is able to determine the position size according to the level of stop and tolerated risk;
     

  3. Move the stop after opening your position. This amounts to calling into question the entire established strategy with potentially increased risk exposure. If necessary, if a trend consolidates, it is possible to use a trailing stop loss.

Good stop loss practices

 

We are now going to highlight the good practices to be followed in the use of the stop loss.

 

Example of a successful stop loss

  1. In a buy position. The price of an asset rises in cycles in the market. It may be good to spot the lowest price reached and set it as a provisional stop loss. On DAX 30 (index market), an uptrend is emerging. The previous lowest price is 22,540 points. It is possible to enter at 22570 points and determine a stop at 22540 points, ie a distance of 30 pips below;
     

  2. In a sell position. Nothing's easier. Just take the previous method and reverse it. Either the last peak reached is at 22,570 points. The trader is placed on sale at 22,540 points and position his stop loss at 22,570 points, or 30 points above;
     

  3. Don't put it too close to the entry price. This means exposing yourself to a huge risk of loss of capital because the volatility can be significant and come to touch the defined stop limit when the forecast trend is good. Rather choose to put it 22550 points rather than 22560 to use our example;
     

  4. Raise the stop to the opening price if the trade goes as expected. This allows the position to be locked and a zero loss to be guaranteed. Either in a buy position, slide the stop loss level to 22,570 points. Or 22,540 points in case of sale.

Stop Loss Take Profit in trading

 

What is Stop Loss Take Profit in trading? These are the 2 facets of the same coin. This strategy aims on the one hand, as we have seen in the definition of Stop Loss, to protect against a certain level of capital loss, and to lock in a certain amount of gain with Take Profit.

These 2 orders offer great comfort to traders since they avoid a large part of the errors induced by the psychology of the trader: not recognising a bad decision / seeking at all costs a better gain on an investment. The Stop Loss Take Profit allows you not to fall into the trap of volatility. These 2 levels must be integrated into an established trading strategy and strict money management for lasting protection of a stock market investment.

In addition, this method saves considerable time in a trading session since it is no longer necessary to stay in front of your screen to follow the progress of trades.

It is true that in the event of a very strong trend, locking the entry and closing prices in this way can prevent taking full advantage of a bullish (buy) or bearish (sell) trend. If necessary, it is always possible to place a new order, after a new technical analysis, with a new level of Stop Loss and Take Profit.

Stop Loss in scalping

 

We have widely emphasised: Stop Loss is a powerful ally in any form of trading. It is used to provide the assurance of a capital protection strategy and thus reduce losses, in the short, medium and long term. Still, it makes even more sense in scalping.

This is the basis of a short-term strategy to guarantee good profitable performance on a large volume of positions. For example, the high volatility of forex (currency pairs) offers a lot of opportunities in a single session. To avoid flaring up in the financial markets (which can happen quickly), Stop Loss has its place, or even is essential. The tolerated level of risk is respected. The losses are curbed at the minimum of the money management. The evaluation of the effectiveness of a strategy is almost instantaneous. Scalping and Stop Loss are inseparable for any trader who wants to last a long time on the stock market.

How to place a Stop Loss on MetaTrader?

 

MetaTrader is the favourite software for forex and CFD brokers. Its ease of use, great flexibility and integrated tools provide great convenience for users. Placing Stops Losses on MetaTrader is therefore simple. The method varies from one broker to another, but the process is identical.

  1. Choose the asset to trade: forex, shares, indices , cryptocurrencies;

  2. After technical analysis, define the orders to be placed: buy or sell;

  3. Determine the entry price and the leverage effect;

  4. Define the Stop Loss (in the order placement terminal) before opening the position;

  5. Or set the limit after opening directly on the chart;

  6. Follow the evolution of the trade by identifying the different benchmarks: entry price in black, stop loss in red, take profit in green.
     

Trailing stop: what is it? Definition

 

The trailing stop, or trailing stop, is a stop loss order that follows the real market price of an asset, and which is blocked when the trend goes against the projection made. In other words:
 

  • In a buy position, the trailing stop increases at the same time as the price of the asset. Then maintain its level if the price drops. In the same way as a classic stop loss, if the maximum level of points defined is reached, the position closes autonomously;

  • In a sell position, the trailing stop works in reverse. That is to say, it follows the fall in the market price. In the event of an increase, it is blocked while waiting for the next evolution.
     

An investor can, with certain brokers, combine the various stops - stop loss and trailing stop - in order to give himself the assurance of a little more marked protection of his positions. MetaTrader includes it in its Calculation Terminal. eToro and Admiral Markets both offer it for free.