Popular Stop Loss Strategies
The main aim of trading is to generate profits and accumulate income. In forex trading, generating profits is not always guaranteed. Oftentimes a forex trade doesn’t go according to a trader’s plan. This is why it is highly advised to use trading strategies that could save traders funds.
Professional traders always have a trading plan, and they make sure to follow the trading plan. This trading plan enables trade to make good and correct decisions during a trade. This trading plan includes a profit target, stop loss, technical tools to use, volume of trade, and the amount of risk to be used. A trader must use stop loss in trades. This is why most traders always lookout for popular stop-loss strategies. In this article, we will discuss the prominent stop-loss techniques used by traders in forex trades. But before that, let’s explain what stop-loss is.
WHAT IS STOP-LOSS?
Stop-loss orders are generally known as orders used during a Forex trade to limit the loss of the trade. A stop-loss order is an order given to a broker by a trader to stop the trade. This order states a specific price that the trade is not allowed to go beyond. It means that when the price of the currency pairs falls below that price, the trade will be automatically closed. For instance, when a trader enters a EUR/USD trade at $1000 and sets stop-loss at $990, the trade will be automatically closed when the price falls below $990. This means the trader’s loss will be limited to $10.
TYPES OF STOP-LOSS ORDERS
There are three main types of stop-loss orders, they are:
Buy and sell stop-losses
WHAT IS A BUY STOP-LOSS ORDER?
A buy stop order is limit orders placed by traders who are opening a short position. This means that the trade is being sold with the hope of a price reduction. A buy order is set to counter the trade in an event where the price rises.
WHAT IS A SELL STOP-LOSS ORDER?
This stop-loss order applies for a long-term trader who opens a buy trade with the hopes that the trade will increase in value. The trader sets a sell stop-loss order, countering the trade and limiting the loss of funds if the value of price decreases more than expected. The trader profits from the market if the value of the asset increases rather than falls.
A trailing stop-loss order is a normal stop-loss order that follows or tracks the price of an asset as it varies. The trailing stop is fixed at an amount, or a particular number of levels off from the present market value. The fixed trailing stop adapts to the volatility of the trade, as the stop-loss adjusts to fit the new value.
For instance, during a trade, the trailing stop increases just as the value of the trade increases, keeping a fixed point away. If the market plunges downward, the trailing stop maintains the new high point. These stops help in safeguarding the trader’s profits and funds by shifting to the path of the winning trade while making sure a stop-loss is set in case the market moves unfavorably.
However, this also applies to a regular stop-loss order, there is no guarantee that your position will be closed at your set stop-loss. In cases where the market gaps or you encounter slippage at the top or bottom of your set stop-loss, it could result in your trade closing at the next available price.
GUARANTEED STOP-LOSS ORDER
In a case where you are certain that the price of trade will close at a particular level, you set your stop-loss to that level. This procedure helps you to avert the risk of spillage.
This type of stop-loss is a strong risk management technique when a trader is worried about market volatility or gapping. However, this set stop Loss can always be canceled or changed to a normal stop-loss order, or trailing stop at any point.
HOW TO SET A STOP-LOSS
A stop-loss order can be fixed on all open trades with the use of a good reputable broker. Ensure that the broker provides all the necessary tools needed to open and close this position. Additionally, ensure that the broker has the technical tools that can be used in monitoring price charts and setting an adequate stop-loss.
Listed below are the procedures required in setting an adequate stop-loss order.
- Register with a broker and open a trading account.
- Choose your trading instruments, it could be Forex, CFDs, or Stocks. Just ensure to pick the trash g assets that fit your strategy. However, you could always decide to open trades with a virtual account before trading live.
- Pick a tradable product to speculate on and open the live trading chart.
- Look for the order settings in the live chart menu and select them.
- Customize your preferred stop-loss order, take profit, etc.
- Then you can start trading with the input parameters.
ADVANTAGES OF TRADING WITH STOP LOSS
Trading with stop-loss orders comes with a lot of advantages. Listed below are the numerous advantages that come with trading with stop-loss orders.
- The best thing about trading with a stop-loss order is that it is free to set up. A stop-loss order is similar to free insurance that ensures the safety of your funds. It is free, and it cost nothing, so there is no excuse why not to set a stop-loss. The only commission charged in the trade is the normal commission charged at the close of trade.
- With an implemented stop-loss order, a trader does not constantly need to watch his or her trades. You don’t have to be scared, and continually monitor the performance of the trade, this is because with stop loss you don’t have to be frantic about the outcome of a trade. You can place a trade set your stop loss and go on a vacation.
- Stop-loss orders help a trader to trade without the effect of emotions. For instance, when a trade is performing badly, a trader might decide to still leave the trade open, with the hope of the trade pricking up, doing this could lead to more loss of funds. With a set stop-loss, a trade automatically closed when it falls below the set stop-loss level.
- To become a professional trader, you must learn to stick to a strategy. Sticking to a strategy will help you be a disciplined trader. The use of stop-loss stops a trader from easily changing trade decisions and strategies. This means a properly set stop-loss stops a trader from making trade decisions based on his/her emotions.
It is important to note that a good stop-loss order does not guarantee a successful trade. However, it increases the chances of trade becoming successful, but it doesn’t guarantee the profitability of the trade. It is advised to incorporate the use of stop-loss with good technical tools and other trading facilities that help in pinpointing a good trading opportunity. Also, some strategies render the use of stop-loss useless, for example, scalping. Scalping requires a trader to open and close trades within seconds and minutes. Setting a stop-loss won’t be effective, as the position will only be kept open for a short time.
DISADVANTAGES OF TRADING WITH STOP LOSS
Trading with stop-loss orders has its disadvantages, however, its advantages surpass its disadvantages. Listed below are the disadvantages of trading with stop-loss.
- The major disadvantage of trading with stop-loss is the aspect of fluctuation in trades. In a short-term trade, price fluctuations can trigger the stop price, thereby closing your trade prematurely. In most short-term trades, prices are known to constantly fluctuate. An experienced trader will know this and set his stop loss accordingly. A new trader might end up setting his/her stop loss for 5% in a trader that has historic data of fluctuating in price by 10%. This could invariably lead to loss of funds, and close of trade without any profit.
There is no set rule as to when to set a stop-loss and when not to. Setting a stop loss depends on the trader’s strategy and plan. A professional trader will mostly set his stop loss at -15% for a trade known to swing below 10%, while a newbie might use a 5% stop-loss level.
- Another disadvantage when it comes to stop loss is that, in a fast-moving market, the price of the market might fall below a stop-loss order and still plunge up. This automatically closes the trade making the trader lose out on great trading opportunities.
POPULAR STOP LOSS STRATEGIES
One of the best trading strategies is a stop-loss trading strategy. These strategies are used by most traders to take advantage of the market and generate profits. They are easy and very effective, as all it requires is to set your stop-loss at strategic points.
We will be looking at the three popular stop-loss strategies, they are:
- CONFLUENCE STOP
- VOLATILITY STOP
- TIME-BASED STOPS
The most popular stop-loss strategy used by traders is Confluence stops. Traders make use of technical indicators such as moving averages, Fibonacci retracements, trendlines, support and resistance, channels, and the previous highs and lows of an asset to set this strategy.
Cons: Traders utilize evident price points with the confluence stops which makes the confluence stops susceptible to stop runs. This is particular with technical traders who set their stop-loss points on the opposite side of support and resistance. Price action pattern traders notice that their stop-loss levels barely get hit before a price reversal to the opposite direction occurs.
Tip: If the price frequently takes out your stop-loss level by a few points, it is advised to add more confluence points and fix it outside the danger area.
Volatility stops are mainly used by experienced traders, most new traders are not even aware of this trade g strategy. These professional traders follow this trading strategy, and it has proven to be highly profitable.
This strategy is a stop loss procedure that adjusts to changing market situations. When the Volatility of the market is high, traders set their stop loss using a larger stop loss level to accommodate bigger market swings. When the market volatility is low, traders utilize smaller stop-loss levels.
Your stop loss determines the level of your profit. Therefore, when setting your stop loss far away from the value of trade during high volatility, ensure to look at all the basic targets to accommodate high prove swings and reduce the effect of the risk-reward ratio. However, when there is low market volatility the stop loss level should be set closer to the price of the asset.
This particular stop-loss strategy can be used to support the confluence and volatility stop. This strategy is a more active type of stop-loss strategy, that enables traders to allocate price and their trade concerning the markets.
For instance, a time-based stop is used when a trader enters a trade with the and the trade doesn’t go according to the trader’s plan. If a trader opens a buy position based on the trade signals released by a price action chart. The trade ends up moving in the opposite direction and having a bearish run instead of a bullish run. It’s highly advised for the trader to close the trade. This is done to cut losses and save the remaining funds. A time-based stop is the trade g tool used in this strategy.
This stop-loss strategy helps a trader to avoid risky market conditions or unpredicted trade situations.
Incorporating a stop-loss strategy into a trade is one of the best trading strategies there is. This strategy has been shown to help a lot of traders conserve funds and avoid unfavorable market movements. Almost every trader use stop Loss strategies in All their trades. The strategies have been tested and trusted, and they have shown how effective and useful they can be in a trade. However, it is important to note that stop-loss does not guarantee profitability in a trade, but rather helps in reducing risk leveled in a trade.