What exactly is a “Stop Loss Order”? For complete beginners, it is a very important function on your trading platform that allows you to put an automatic exit on your trade preventing it from incurring any further loss.
Let’s say for example that you opened a LONG order on the forex currency pair of EURUSD at a price of 1.1100 because you have predicted that it will going to rise in the next few days. But if you are wrong, you are willing to risk 30 pips loss so you set your Stop Loss at a price of 1.1070.
Now, assuming that the trend went down against your speculation, your Stop Loss will put a cap of up to 30 pips max loss before closing your trade.
There are actually two ways on how traders utilize Stop Loss.
One: Traders will rely on their Stop Loss in all of their trades to close their positions. It is their main exit plan of getting out from a bad trade.
Two: The second way on how traders use their Stop Loss is when they really needed it. It’s because they exit their trades manually especially when they can see an opportunity that the trend will change in direction. Thus, they may often make necessary adjustments to the positions of their Stop Loss.
There are some parts of the world where power outage and internet connection are a problematic issues. Just imagine yourself opening up a trade and it was left there hanging on its own when you lost connection. Two things could happen which is either good or bad.
It’s good if you gained profit when your connection came back but you will surely get disappointed when it’s the opposite.
This is the main reason why you should always immediately setup a Stop Loss.
The most common mistake by new traders is that, they don’t use Stop Loss because they think that their trading position will reverse back into a winning direction. But this isn’t usually the case, their losing trade will most likely end up incurring bigger amount of loss.
By using Stop Loss on every trade that you make, this actually trains your insight and skill at determining a good exit plan. Thus, you get to discipline yourself about how much risk you are willing to take.
The most commonly used type of Stop Loss is the “Market Order”. All you have to do is to setup the exact Stop Loss price that you want your position to be automatically closed. So when the market price touched it, your trade will immediately be closed.
However, there is one major downside to Stop Loss Market Order which is called, “slippage”. This is a market condition where the prices incur huge fluctuations. If it happens that the sudden movement of the prices went into your losing direction, your Stop Loss may not exactly get triggered at the exact price that you setup.
In short, you end up losing more than the risk that you setup on your Stop Loss position.
Due to slippage, this is the reason why some traders just use Stop Loss only on a worst case scenario. They tend to rely more by manually exiting their trades especially when the trend is on their side.
Anyway, slippage rarely occurs so there is no reason for you to worry so much about it. Using Stop Loss Market Order for exiting your losing trades is still the best protection that you can have.
Another Stop Loss option that you can use is the “Limit Order”. Just like the Market Order above, you get to setup the price that you want your trade to get stopped.
Here’s the good part. You trading position will only be closed by your Stop Loss Limit Order when the current market price gets closely near or exactly at the price that you indicated. It is actually a good way to counter slippage issues.
But here is what you also need to know, Stop Loss Limit Order can turn against you especially during an aggressive market condition. There are chances that your Stop Loss won’t get triggered where it gets bypassed. This could result into a huge loss.
Conclusion
Again, slippage is actually not a main concern because they rarely happen. Thus, it is best to use Stop Loss Market Order as the best exit strategy especially for beginners. As you gain more experience, then you may want to try manual exit but still with a Stop Loss on the side in case the worst unexpected case suddenly occurs.
There is actually no reason for you why you shouldn’t use Stop Loss.
Let’s say for example that you opened a LONG order on the forex currency pair of EURUSD at a price of 1.1100 because you have predicted that it will going to rise in the next few days. But if you are wrong, you are willing to risk 30 pips loss so you set your Stop Loss at a price of 1.1070.
Now, assuming that the trend went down against your speculation, your Stop Loss will put a cap of up to 30 pips max loss before closing your trade.
There are actually two ways on how traders utilize Stop Loss.
One: Traders will rely on their Stop Loss in all of their trades to close their positions. It is their main exit plan of getting out from a bad trade.
Two: The second way on how traders use their Stop Loss is when they really needed it. It’s because they exit their trades manually especially when they can see an opportunity that the trend will change in direction. Thus, they may often make necessary adjustments to the positions of their Stop Loss.
Power Outage and Internet Issues
There are some parts of the world where power outage and internet connection are a problematic issues. Just imagine yourself opening up a trade and it was left there hanging on its own when you lost connection. Two things could happen which is either good or bad.
It’s good if you gained profit when your connection came back but you will surely get disappointed when it’s the opposite.
This is the main reason why you should always immediately setup a Stop Loss.
Discipline in Getting out of Bad Trades
The most common mistake by new traders is that, they don’t use Stop Loss because they think that their trading position will reverse back into a winning direction. But this isn’t usually the case, their losing trade will most likely end up incurring bigger amount of loss.
By using Stop Loss on every trade that you make, this actually trains your insight and skill at determining a good exit plan. Thus, you get to discipline yourself about how much risk you are willing to take.
What is a Stop Loss Market Order?
The most commonly used type of Stop Loss is the “Market Order”. All you have to do is to setup the exact Stop Loss price that you want your position to be automatically closed. So when the market price touched it, your trade will immediately be closed.
However, there is one major downside to Stop Loss Market Order which is called, “slippage”. This is a market condition where the prices incur huge fluctuations. If it happens that the sudden movement of the prices went into your losing direction, your Stop Loss may not exactly get triggered at the exact price that you setup.
In short, you end up losing more than the risk that you setup on your Stop Loss position.
Due to slippage, this is the reason why some traders just use Stop Loss only on a worst case scenario. They tend to rely more by manually exiting their trades especially when the trend is on their side.
Anyway, slippage rarely occurs so there is no reason for you to worry so much about it. Using Stop Loss Market Order for exiting your losing trades is still the best protection that you can have.
What is Stop Loss Limit Order?
Another Stop Loss option that you can use is the “Limit Order”. Just like the Market Order above, you get to setup the price that you want your trade to get stopped.
Here’s the good part. You trading position will only be closed by your Stop Loss Limit Order when the current market price gets closely near or exactly at the price that you indicated. It is actually a good way to counter slippage issues.
But here is what you also need to know, Stop Loss Limit Order can turn against you especially during an aggressive market condition. There are chances that your Stop Loss won’t get triggered where it gets bypassed. This could result into a huge loss.
Conclusion
Again, slippage is actually not a main concern because they rarely happen. Thus, it is best to use Stop Loss Market Order as the best exit strategy especially for beginners. As you gain more experience, then you may want to try manual exit but still with a Stop Loss on the side in case the worst unexpected case suddenly occurs.
There is actually no reason for you why you shouldn’t use Stop Loss.
No comments:
Post a Comment