Where To Put Stop Loss Orders in Place

Importance Of Stop Loss Orders

A stop loss order is crucial to be able to trade profitably in the long run. A trader’s goal cannot be to take profit on any single trade he ever does, as it’s simply impossible to be 100% right every time with your estimation concerning price movements. No trader in the world has a 100:0% ratio of profit to losses. The target is to make more profit than loss of money overall. A trader must be able to accept some losses here and there as part of the business.

Choosing A Suitable Level For The Stop Loss

A wise trader puts his stop at a level where he has to assume that the trend is going to be broken, according to what the indicators tell him is possible or probable. Usually, this would be a broken trendline in the time frame he’s trading in, or a support level which gets broken.

It’s also important not to set the stop loss too tight, as the current volatility could execute it without reason. A price has to have the opportunity to move around the entry within a certain range. It is common for this to be at least as far as 1.5 times the current high-to-low range.

This will often be right, but sometimes not. Price can move back over the trendline unexpectedly and go on within the trend, but more often it won’t. Especially not immediately. When having been stopped out, you always have the opportunity to go back in. But in a case where price movement keeps reversing, the smart trader’s capital has been saved.

Be Careful with Break-Even Stops!

Moving the stop loss too early to break even is a typical beginners mistake, as their entry level is often a key support area where price returns, because market makers know these areas and do stop squeezing. This means they expect you to have your stop at your entry and they drive price back to shake you out. That’s why skilled traders wait until after such shakeouts until they adjust their stop loss orders.

Caution: Possibility Of Orders Not Getting Executed

Stop Loss Not Or Only Partially Executed

There is one very important point concerning stop loss orders which you must be aware of:

When you set a stop limit order – meaning you set the price at which you want to sell – it can happen that your order doesn’t get filled. That’s the case when there haven’t been enough buy orders at that level. The market price can flunk through your stop loss order interval when you set a stop limit order with too little distance between stop price (trigger) and sell price (lowest limit where you’re willing to sell).

This situation can be avoided if you set a larger distance between stop and limit and in this way, you enhance the chance that there are enough buy orders to catch your sell orders, too.