Trading strategy with stop loss. What Is a Stop-Loss Order? When the desired price is reached, a stop loss order automatically buys or sells assets, so you don't pay above or sell below market price. Also called a stop order, investors use an automated tool to trade only up to specified prices to set loss limits and mitigate risk. Source:
For instance, if you set your stop loss at 10% below the buying price of an asset, your loss won't exceed ten percent. In a stock trading scenario, you can buy shares and set a stop loss order for when the prices fall to a specified amount, and your assets are sold at the current market price. A stop-loss order is vital in risk management, and you'll use it to impact the size of your position while determining reward-to-risk and risk-per-trade ratios. You can place regular stop losses like charts, equity stops, or a combination.
How to Use Stop Loss Order As a market order type, you should consider fundamental analysis factors like current underlying conditions and the likelihood of slippage. That's the difference between the expected and actual price that a trade is executed and occurs due to causes of high
. Such occurrences are common after news releases, events that impact price when you're entering or exiting a trade, and your stop loss order will last until: The predefined stop loss level is reached. Stop loss is removed before you’ve closed the trade. The trade is closed.
Types of Stop Loss Orders All your trades should have a stop-loss order to
. There's a risk of losing a substantial amount if only one trade goes wrong. That's a grim prospect, as the loss may indefinitely affect the size of your trading account. Stop losses are categorized according to the rules you can apply when you're setting a stop loss up, and these include;
Equity Stops An equity stop is based on the percentage derived from your account's size, and you can set stop losses to close positions once your account size depreciates to a certain amount.
Chart Stops If a stop loss order is set up based on support, resistance levels, or significant price action, it's a chart stop. However, it can only remain valid if these zones are respected when setting a stop loss up, either above or below the defined zones. Source:
If a chart stop's support and resistance levels, which represent a boundary or obstacle, are broken, the stop loss order ceases invalidity.
Volatility Stops A volatility stop is a stop-loss order based on the average price-volatility index of the traded instrument. If the current volatility of an asset isn't enough to dissuade you from exiting a trade, you can set up such stop losses so that you're not
when it starts working against you. You can use an Average True Range or ATR indicator to determine where to place a stop-loss order based on volatility.
