How to set a stop loss correctly

Before calculating your profit, learn not to lose the capital that you have already invested in the market. The correct Stop Loss should protect your deposit.
You cannot and should not constantly monitor an open trade. The trader’s task is to determine the acceptable level of risk for himself and then the market will take care of your order itself. So the next concept after you begin to distinguish between BUY and SELL transactions should be Stop Loss.

Stop Loss order: what is it and why?

Stop Loss (from the English “stop losses”) is a special trading order, which means an order to the broker to automatically close your transaction when a certain loss level is reached. It works using the pending order method and is triggered when the price specified in the transaction parameters appears on the market. The goal is to limit losses when it is impossible to close an order manually. The Stop Loss level is determined by your money management system.

In addition to the fact that a stop protects a transaction from loss, it also fixes the profit already received - it is enough to simply move it in the breakeven zone - manually or automatically.

Having a stop will save your deposit in case of technical problems (for example, loss of connection with the server), which is especially important for short-term trading.

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Application of stop loss in trading operations on the Forex market.

Stop loss , as well as take profit , are the most important tools used in currency trading; unfortunately, for many traders, their correct use is an insoluble task. We will try to do everything so that you can understand the nuances of using these tools and get the maximum benefit from it.

Stop loss allows you to limit losses, take profit limits profits. Everything is very simple, as soon as the price reaches a certain level, the transaction will be closed at profit or loss, depending on the instrument used.

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The use of stop loss, as well as take profit, is an excellent opportunity to save yourself from unnecessary worries; you insure yourself against excessive financial losses or fix a certain profit. These tools are created precisely for this purpose; they make life easier for a trader. How it works? For example, we open a certain deal and set a stop loss or take profit. Now you don’t have to worry, even if you’re away from the terminal for a week, no serious problems will arise. You will be able to make profits or losses that are strictly regulated by the instruments displayed. These modern tools give traders confidence, security, and allow them to sleep peacefully without worrying about trading or incurring a huge loss. You will be able to record profits and losses without any problems.

Let's look at stop loss.

I am sure that you need to set a stop loss before opening a trade, this is a really important parameter, for me such an action is mandatory.

I have had situations where I did not take certain news into account when opening a trade and lost approximately $15,000. There are also frequent situations when people open a trade and are a little distracted by other things, without having time to set a stop loss. Then the most important news appears, the market immediately falls by 1000 points and you lose 10,000 bucks. By setting a stop loss in a timely manner, you can reduce your losses to $400, do you feel the difference? Regardless of the size of your deposit or experience in trading, always set a stop loss at the very beginning of the trade to protect yourself from unnecessary problems.

Part 1 – Where should I place my stop loss?

Constantly in those places where you are sure that you are wrong.

This is a kind of point of no return. The price reaches a level where you clearly understand that you were wrong with your forecasts and want to close your position.

Experienced traders quickly identify such points. Most often, they place a stop loss beyond a certain level or value. Novice traders do not know how to act so quickly and efficiently. It is difficult to understand at what point you will be wrong; constant doubt significantly affects the result.

I believe that a beginner trader can use average stop loss values. For example, if you often close transactions from 30 to 70 points, then set a stop loss at 50. There is no need to hide the stop behind certain levels, set 50 and that’s it, close the deal.

I also sometimes have problems with correctly determining the stop loss, but I simply set it to 40 points, I always do this in such situations. This is a panacea for nerves and problems; you can’t accurately determine your stop loss? Put 40 points, this already allows you to limit your losses, there is nothing to worry about.

Part 2 – Should I change my stop loss?

There are traders who move the established stop loss on a regular basis. As an example, consider a trade that goes against the trader and is approaching its closure at the established stop loss. They simply take and move the stop by 20 points. As soon as the price begins to approach again, the stop loss is moved again. As a result, we get a stop of 100 points instead of the original 40. I admit, I myself often acted exactly like this, but I’ll say right away that there is nothing normal about this, you can’t act like that!!!

This is especially important for traders who are just starting to trade. Strictly forbid yourself from messing around with a stop loss and moving it depending on how the trade is going. Always act methodically, no matter how the situation turns out, let the trade be closed at the established stop loss.

This tactic will save you money. Initially, it seems that by moving the stop, you can improve your position and take profit. But in general, all these manipulations neutralize profitable trades and you lose money, think about it.

For experienced traders who push stop losses, I advise working with certain limits. For example, I have a limit of 50 points. I very rarely move my stop loss and never go over the limit, no matter what happens to the price. 10-20 points is enough to hedge your bets and avoid risk.

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Part 3 – What to do if the price moves upward? Do you need to move your stop loss behind it?

This movement has its own name - trailing stop. I really don't recommend using this.

Trading at fairly high volatility, I used this stop. I am sure that manual fixing is a more reliable option, despite all the advantages of a trailing stop that inexperienced traders describe.

The first point of moving the stop loss to positive is to breakeven.

When the price moves in your direction, you already have a good profit, then when it (the profit) on the transaction is 30-50 percent of the movement, but not less than 60 points, you do not need to move the stop loss to breakeven.

Part 4 – In what situations should you move your stop loss?

When moving the stop loss, keep in mind our initial rule, it should always be in the cancellation zone of our plan. As a rule, the distance should be from 60 to 90 points, it is worth taking into account the specifics of the situation and volatility. You can move the stop loss only for profit. This will avoid unpleasant moments: you have 220 points of profit, for example. Take profit is only an insignificant 20-30 points short. There is confidence that everything will be fine and you leave the terminal. You come back a few hours later and see that instead of a good profit, the deal was closed with a stop loss. To avoid such unpleasant situations, move your stop loss behind the price.

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How to set Stop Loss in the terminal

Stop Loss for a buy order is set below the opening price and is triggered when the price rolls back down. When moving in the direction of profit, it moves up behind the price.

Stop Loss for bearish trades is located above the entry price of the trade and will close it upon a pullback upward. To take profit on a downward trend, stop down behind the price.

Stop orders are present in any trading platform: in MetaTrader 4(5) - in the desktop, mobile and web versions, Stop Loss is set approximately according to the same scheme.

SL can be set immediately upon entering the market (“immediate execution”) or in the parameters of a pending order, but you can add it to a transaction or adjust its parameters at any time (“Modify or delete order”).

Each broker sets the minimum distance (in points) from the current price (ask or bid) to the potential Stop Loss price. Usually this is 2-3 points, but the value depends on the specific asset and market condition. For example, during news periods or a low-liquid market, this distance increases - you can place any stop no closer than 20-50 points from the current price.

In Forex, “unsecured” (in simple words - market) Stop Loss is most often used, taking into account the slippage margin: the execution price is not guaranteed, and the broker has the right to close the order if the market price is in a certain range around the SL price in the order.

In stock trading there is the concept of a guaranteed Stop Loss - the broker undertakes (“guarantees”) to execute the client’s order at the stated price. The service of such a stop is usually paid, because if the market does not have the price specified in the application, then the broker will pay the client the difference with the nearest available price exceeding the stop level. Typically, scalpers rely on such a stop, but more often than not, a broker, even if he receives a fee for guaranteed execution, does not provide such a service during periods of unstable markets (read the trading conditions carefully). An example of such a situation is the flash crash on USD/CHF (01/15/2015) after the Swiss franc was lifted from the euro.

In exchange terminals and MetaTrader5, SL processing can be linked to the terminal time. For example, if a pending order is not triggered for a long time, or the price does not move towards profit until a certain point (say, before the close of the session), then such a stop will cancel or close the trade.

Cutting stop losses in trading

Nobody likes to place stop losses because they lock in losses. Therefore, it is important to set it in such a way that it does not interfere with making money on the growth of the asset.

A common problem among beginners is setting the SL too short. In some cases it is appropriate to use this, but more often than not, due to considerable market volatility, it is not possible to set the minimum values. A valid position may be closed due to random market noise.

When trading was not carried out over the Internet, it was less volatile and jerky. There were fewer “needles”, fewer false movements. The current twitching on the charts is largely due to the phenomenon of “cutting stop losses” among weak players.

A big player needs to make money on the stock exchange. Since his capabilities are much greater than even the most wealthy trader, he can easily move the price by a couple of percent. The market maker needs to purchase as profitably as possible in order to be able to make money. To do this, he “takes out” weak players from the market by taking cheap assets from them in their footsteps.

Very often, after a needle, the price sharply turns in the other direction and can move in the opposite direction for a long time. This is the main “pain” of small players, because they guessed the direction of the price, but found themselves thrown out before the start of the rally, and also suffered a loss.

Brokerage stops have accumulated, so they are able to estimate in advance how much assets can be bought back if the price is pushed in some direction. This is an extremely unfair game, but an ordinary trader has no choice but to adapt to current realities and avoid falling for these maneuvers in every possible way.

There is no 100% protection against such situations. But you can protect yourself only by not placing your SL on round numbers and near strong support and resistance levels.

How to set Stop Loss in Quick

The popular Quik exchange terminal offers several types of stop orders: with a related order, StopLimit, stop price for another stock. For StopLimit it is not necessary to have an open position: such orders are used similarly to SellLimit/BuyLimit in MT4(5). For example, if a sale is open, but there is a risk that the market will begin to rise, then a stop limit order to buy “above the market” is placed. Then, at the reversal, the current sale will close (at a loss) and a new purchase will open. Such orders are beneficial (and dangerous!) in that while they are not relevant, they are not visible in the general order book and are stored only on the broker’s server.

Please note: in Quik, the "Deadline" field is set to "Today" by default, meaning that the order is canceled after the close of the trading day. If you need to save the application, then select the “until cancellation” option or specify the exact expiration time.

How to correctly calculate Stop Loss

The calculation method depends on the trading strategy and market situation; we will list only the main ones. Stop Loss can be set:

fixed in points, take profit/stop loss proportions - at least 2-2.5:1;
fixed as a percentage of the opening price;
by volatility range - the ATR indicator is usually used and StopLoss is determined in points, for example 2ATR,
by technical indicator points - for example, Parabolic SAR or Fibonacci levels;

by key points of a candlestick, graphical or wave analysis pattern;

by price extremes on the chart;
at strong price levels.

Before each entry, it is recommended to determine the stop (and profit) level in advance, without the risk of rapid triggering. If such a point is difficult to determine, then the risk of entry increases sharply - perhaps such a trade should be skipped.

Move stop loss to breakeven

After a positive start in a particular trade, you can move your stop to breakeven (set it at the opening price). The protective order should be moved following the price, since, as they say, “yesterday’s stop is no longer relevant.” The market is constantly moving and therefore you need to make decisions according to the latest data.

Trailing stop - what is it?

You can move the stop loss only in the direction of the trend. If the position is opened incorrectly, then you should not move it in the direction of increasing losses.

When strong trends are developing, the stop loss should not be moved close to current prices, so as not to be thrown out of the main movement due to random fluctuations. Stick to average volatility and candlestick size analysis.

How does a trailing stop work?

The trailing mechanism or sliding stop protects the existing profit - after the transaction reaches breakeven, the SL order moves with a certain step towards profit. This ensures that the trade ends in profit. When trailing is in effect, the stop order can be moved manually. You can disable trailing in MetaTrader at any time.

For trailing, two parameters are set (in points): the first is the minimum profit level when the process starts working, and the step with which it then “slides” behind the current price. The trailing step can be selected from the recommended values in the additional menu or specified manually.

Please note that:

a small step causes rapid response and the meaning of such protection is sharply reduced;
trailing stop works only in an active session - if you close the terminal, the Stop Loss will remain at the last level before disconnecting;
if you have several platforms open, say, a desktop version and a mobile one, then trailing will work until you close ALL active sessions;
If you seriously count on a trailing stop, we recommend using the terminal options with a VPS server.

Strategies for using a stop loss order.

First of all, it must be said that there are no uniquely correct methods for using stop losses in trading. There is no universal recipe that will suit all trading strategies and market situations equally well.

Correctly setting a stop loss is a rather complicated procedure in terms of calculation. Technically, the installation process does not take much time and effort, as you have already seen for yourself using the above instructions. But the side of calculating stop loss lies in the plane of the trader’s theoretical competence, completeness of knowledge of the trading strategy used, as well as experience in general. It is the latter that is often a good advisor, since thanks to him the trader better understands market movements and can evaluate possible scenarios through the prism of previous transactions or specific situations.

Read: “What is volatility?”

It is important to understand that the stop loss value is a local parameter that depends on many variables that exist at a particular point in time. Overall volatility, proximity to important price levels, aggressiveness of trading and many other factors become extremely important in determining the value of the stop loss. In total, several general strategies can be identified, but, as you already understood, none of them should be used in their pure form without taking into account the specifics of a particular transaction:

1. Fixed stop loss – probably the most common option. Like all strategies, it cannot be called either bad or good, since in one situation its use is justified, but in another it is completely inappropriate. It consists of using a fixed stop loss value equal to a certain number of points from the order opening price. For example, in each trade you can set a stop loss at a distance of 50 points from the opening price (above or below the price depending on the type of order). The method is more relevant for traders who adhere to a strict money management policy.

2. Flexible stop loss is a more universal and reliable method of setting stop loss, based on an analysis of the current market situation. The basis for choosing a stop loss value may be previous price lows or highs, graphic levels, or any fundamental reasons. This method is preferable, since the stop loss is more adapted to the market, and the number of random triggers will be significantly less than when using a fixed value.

3. Break-even trading – a non-standard use case mentioned above. The essence of the method is to move the stop loss level from the unprofitable zone (fixing the maximum loss) to the guaranteed profit zone (fixing the minimum profit) at the moment when the price has already traveled a sufficient distance in the required direction. An excellent way that allows you to get as close as possible to realizing the idea of break-even trading, which so attracts not only beginners, but also experienced traders. The only downside is that it increases the likelihood of an order being closed prematurely with minimal profit, when overall there is the potential to achieve a significantly greater profit.

4. Trailing stop (what is it?) – an improved version of the previous method, the difference of which is the use of an automated system to gradually move the stop loss level following the price. Thus, the value of the minimum profit will increase by as much as the price increases. The main setting of a trading stop is to determine the minimum distance from the stop loss to the new price at the time of transfer. For example, the trailing stop for a sell trade is set to 10 points. If the price drops to a new low, the stop loss will automatically move after it, but no closer than 10 points. For a better understanding, it is worth saying that in this way the stop loss moves only in one direction, the profit side. It does not move in the opposite direction, since it simply does not make any sense.

Disadvantages of Stop Loss

In addition to psychological discomfort (greed, for example), the following problems can be identified:

Hard feet

They interfere with dynamic trading, especially if the trader decides on a non-standard solution. If the market price is too close to the SL price (in the slippage range), then you will not be able to manually adjust the parameters or cancel the stop of an open order. Try to react to the situation in a timely manner or use an automatic advisor.

Irrational feet

Before setting a stop, keep in mind: a stop that is too close is triggered at the slightest price movement - a mistake made by a beginner who is not ready to lose money. If the stop is too far, then the losses exceed the level of acceptable risk. Under no circumstances should you move your Stop Loss towards the loss in the hope that the market will “change its mind” and turn in your direction. Stop the loss at a reasonable level and re-analyze the market.

The market “sees” your Stop Loss

Technically, the market picture is the same for everyone, and the massive use of “standard” indicators and analysis methods leads to the fact that large volumes of Stop Loss of small participants accumulate at key levels. Marke and deliberately pushes the price to these zones in order to remove stops and honestly put our deposits in our pockets. The problem can only be dealt with by reasonable transaction volumes, competent money management, as well as exchange information on the placement of large volumes. Avoid placing SL in the 10-20 pip zone near strong price levels.

Stop Loss and Gap

If an SL order falls into a gap zone, then usually the broker executes it at the first market price after the gap, that is, according to the market stop scheme, and practically no broker offers a guaranteed stop in such a situation. A more unpleasant scenario can also happen - your SL broker simply does not notice and keeps the losing trade open. Read the trading conditions carefully: as a rule, the broker does not accept claims in such a situation, since formally he is right - there was “no such price” on the market, and he is not obliged to execute your stop. It is impossible to protect investments from such a risk; we can only advise setting stops in strict accordance with money management, as well as carefully analyzing the market for possible gap situations and pulling the stop into a safe zone.

Why you should always set a stop loss order

Some novice traders do not particularly bother with such an issue as setting a loss limit order. Meanwhile, a competent exit from a position (with both profit and loss) is the foundation on which a trader’s success is ultimately built.

Among other things, the size of the Stop Loss order is almost the only parameter that a trader, purely objectively, is able to control. It is never known for certain where the price will go, whether the trader will make a profit or a loss is also not clear, but the size of the probable loss can be quite clearly determined by the size of the stop loss.

You should know that by setting a stop loss order, you have placed full responsibility for its execution on the shoulders of your broker. Now this order is located on his server and will be executed regardless of whether your computer is turned on or whether you have an Internet connection.

Here are a number of other reasons why it is mandatory to install Stop Loss:

Internet interruptions. No one is immune from the fact that even on a super-reliable communication channel, problems may arise that will deprive you of your Internet connection at the most inopportune moment. Can you imagine your feelings when an open position of serious volume is at stake (opened with a large leverage and in the expectation that in the event of an unfavorable price movement you will be able to close it manually), and the connection suddenly breaks down?
In moments of strong price movements and high volatility, such a thing as a requote often occurs. This is a situation when a trader sends an order to close a position, and the broker’s server responds with new quotes and asks for consent to close at a new, less favorable price. Such requotes can be repeated one after another, ultimately leading to closure with a loss much greater than the estimated one.
In addition, no one can be protected from a banal overload of the broker's server. Nowadays, DDoS attacks, unfortunately, are not uncommon, and who knows whether your broker’s server will be their next victim. Yes, after some time the consequences of the attack will be eliminated and the server will resume operation, but in these few hours (or even minutes) without a pre-established loss limit order, you can lose your entire deposit.
The moment is purely psychological. If a trader does not set a stop loss, then most likely he does not know at what level he will limit his losses. And this can lead to the fact that he will wait until the last minute, hoping that the price is about to reverse. What this usually leads to, I think there is no need to explain.