Stop Loss Order-A Guide To Trading With Stop Loss Orders

Stop Loss OrderWhat is a stop loss order?  In here you learn the definition of a stop loss order and how to use it when you are buying or selling currencies.

In this post, you learn a lot more about stop loss orders and here are some of the things that I will cover.

  • Definition of A Stop Loss Order
  • Where Are The Best Place To Place A Stop Loss Order On The Chart?
  • What Are The 4 Different Types Of Stop Loss Orders?
  • What are the advantages and disadvantages of using a stop loss order?
  • Examples of stop loss orders?
  • Do Forex Brokers Have Guaranteed stop loss orders?
  • How To Let Your Profits Run Using Stop Loss Orders?
  • Will Using Stop Loss Orders Make Your A Profitable Forex Trader?

These and a lot more so continue to read and find out…

STOP LOSS ORDER- DEFINITION

In the context forex trading, this is the definition of a stop loss order:

a stop loss order is an order placed with a forex broker to buy to exit or sell to exit a trade when the currency pair reaches a certain price in order to limit a forex trader’s loss in a trade.

It is is a very important part of the forex money management (or forex trading risk management) process because the stop loss order closes your trade that is running at a loss.

Imagine what would happen if your have no stop loss order?

Your trading loses will increase until you will get a margin call from your broker when your trading account cannot handle the accumulating loses and the forex broker can close down your trade as part of their risk management process.

 

WHERE TO PLACE A STOP LOSS ORDER FOR A BUY TRADE?

This subject here is forex trading course for the preppies.

Don’t make the mistake of figuring out where to place your stop loss after a trade is placed and your trade is running a massive paper loss. That is too late.

Before you take a trade, as part of your trading plan:

  1. you must determine how much risk you are going to take for the trade.
  2. Based on that trading risk, you then calculate the price level where you are going to place your stop loss order.
  3. Take or execute your trade
  4. Then place stop loss order as soon as the trade is executed.
  5. When you do this, the  stop loss order takes the emotion out of trading decisions

In forex trading and similar to other financial markets, you are either buying or selling. Therefore if you are selling, where do you place your stop loss? Or if you are buying, where do you place your stop loss?

In forex terminology, long means buy (or a buying). So where would you place a stop loss order when you have a long trader?

Let me ask this question in another way: if you buy a currency pair, you make profit when the price goes up so what happens when the price goes down below the price where you bought?

You are dead right, you start to suffer a loss, a paper loss.

Therefore for a buy trade, you place your stop loss order at a determined price level below your entry price. 

So if price falls below your entry price and goes down, your stop loss order will get activated getting you out of a loosing trade.

For example, here’s a EURJPY Daily Chart and if you buy at 126.29 and placed a stop loss below the entry price at 125.50, then you would made profit when the price started to move up after you bought:

where to place a stop loss order on a buy trade

WHERE TO PLACE A STOP LOSS ORDER FOR A SELL TRADE

Again, in forex terminology, a short trade=a sell trade (so you know).

If you are execute a short trade, you want to profit if price moves down below the the trade entry price. You don’t want the price to start heading up when you after you take a sell trade!

If the price start heading up, above your trade entry price, you are going to start suffering a loss, a paper loss. (The only time a paper loss becomes a real trading loss is when you close the trade).

So to protect your trading account and minimize your trading risk, your stop loss must be placed above the sell trade entry price.

Here’s an example of where to place a stop loss order on a sell trade: as you can see, for a sell order, the stop loss order would have been triggered if price went above 139.59 which means your trade would have been a loosing trade:

where to place a stop loss order on a sell trade

As you can see from the two charts above:

  1. for a buy trade, a stop loss order is always placed below the entry price to protect your from further trading loses if price goes down past your entry price to the stop loss order price.
  2. for a sell trade, a stop loss order is always placed above the entry price to stop further trading loss if  price rises above the trade entry price and heads past the stop loss order price.

 

4 DIFFERENT TYPES OF STOP LOSS ORDERS

Here are 4 main types of stop loss orders and here they are:

  • Percentage stop loss order-this is where you first determine what percentage of your forex trading account you are willing to risk on each trade and then place your stop loss order at the price level where you risk will be exactly that if price goes against you.
  • Volatility stop loss order-this technique of placing stop loss orders depends on the how many pips a currency pair can move in a given period of time. If for example, GBPUSD moves 100 pips in a day and if you are a swing trader placing a 20 pips stop loss in a GBPUSD TRADE, you will most likely get stopped out too early because your stop loss orders do not account for the fact that this currency pair moves 100 pips in a day on average!
  • Chart stop loss order-this is where you place your stop loss orders based on support and resistance levels, pivots, daily high or low etc.
  • Time stop loss order-this is where a trader exits a trade with a loss or profit at a predetermined time. This can be a day trader exiting a trade at the end of the day or a trade closing his trade on the last hour on Saturday when the forex market closes to avoid keeping his trade alive during the weekend.

STOP LOSS ORDER EXAMPLES

If you are new forex trader, you’d be interested to see some examples of stop loss orders, right? Very well then, here are some stop loss order examples.

Just remember, I’m using the Metatrader 4 trading platform but the concepts here are going to be the same if you are using other forex trading platforms.

Note these symbols on the char below and their meaning:

  • TP stands for take profit
  • SL stands for Stop Loss

Here’s an example of a stop loss order on an active buy trade:
Stop Loss Order Example on active buy trade

 

Here’s an example of a stop loss order on an active sell trade:

Stop Loss Order Example on an active sell trade

Here’s an example of a stop loss order on a pending buy stop stop order:

Stop Loss Example on Pending Buy Stop Order

Here’s and example of a stop loss order on a pending buy limit order:

Stop Loss Order Example on pending buy limit order

Here’s an example of a stop loss order pending sell stop order:

Stop Loss Order Example on pending sell stop order

Here’s and example of stop loss order on a pending sell limit order:

Stop Loss Order Example on pending sell limit order

FOREX BROKERS WITH GUARANTEED STOP LOSS ORDERS?

There are a few forex brokers that claim to offer guaranteed stop loss.

Now, if you happen to find one broker and open a forex trading account with them and what they say is true then let me know. I’d be interested to open a trading account with that forex broker as well.

My experience with one forex broker has not been so good. I nearly blew my forex trading account on one occasion and maybe to be quite fair, its not the forex brokers fault and not mine either.

Here’s what happened when I was just starting to trade forex, I took a trade not knowing that there was a major forex news coming out shortly. When the news got released, price jumped my stop loss order. Which meant that stop loss order that was supposed to be triggered to get me out of that loosing trade did not happen.

Long story short, I lost  more than $3,000 on that trade when I could have around $150 and spent that night twisting and turning in bed trying to figure out why my stop loss was not triggered. It was only until later I figured out what really did happen.

Therefore, if a forex broker tell you that  they have guaranteed stop loss order, my advice is to take that with a grain of salt.

Here are things that can make price jump your stop loss and if the direction if wrong, you can suffer massive trading losses:

  1. price moves too fast and your stop loss order is skipped.
  2. a forex price gap happens

ADVANTAGES OF STOP LOSS ORDERS

  1. Stop loss orders gives you peace of mind meaning that you know if price goes against your trade, you will get stopped out with the amount of money your planed to risk in the first place.
  2. You don’t have to monitor your trade frequently, you can leave it, go to sleep, go shopping and jump from a plane with a parachute on your back. Your stop loss order will take care of getting your out of a bad trade.
  3. Removes your emotion from trading because your stop loss order will get your out of a bad trade. Most forex trader make the mistake of letting their trading loses accumulate thinking that the price will turn around and this causes them to delay in getting out from losing trades fast. Therefore having a stop loss order alread set in place keeps your away from making this mistake.
  4. Placing a stop loss order allows you to be confident in your forex trading strategy and it can help you to stay on

DISADVANTAGES OF STOP LOSS ORDERS

Here are the disadvantages of stop loss orders:

  1. placing your stop loss order is like a cat and mouse game. You never really know if your stop loss order is placed in a price level that can avoid getting stopped out prematurely or not which means there will be times when price will head to your stop loss order, activate it (which means you are out from your trade with a loss) and head in the direction you were hoping it would go in the first place! Like this example below:
  2. you need to understand the average daily price movement of a currency pair to be able to place stop loss orders that are not going to be stopped out based on the price movement of that currency pair. For example, if you are a position trader and you know that GBPJPY moves 150 pips on average in a day, would placing a 20 pips stop loss make sense? No. That is an example of what I am talking about.

USING STOP LOSS ORDERS TO LOCK IN TRADING PROFITS-HOW?

If you think stop loss orders are just for preventing trading loses,then think again!

You see, stop loss orders are also used for a different purpose too: to  increase your trading profits.

How?

Well, as a trailing stop loss. That’s how.

I’ve written a really good post on the best trailing stop technique and you can click that lick to read and see how to do that.

So what actually is a trailing stop loss order then?

Well, a trailing stop loss order is simply a stop loss order that is used to lock in profits as price moves in your favor.

This allows you to let your trading profits run and this is one way you can make.

So how does a trailing stop loss work then? Here’s how:

  1. you place a trade and trade is in profit.
  2. you move your initial stop loss order to lock in more profits as price starts head in the right direction.
  3. you continue to move that stop loss order locking in more profits as price continues in the right direction until your take profit target is hit or price reverses and hits your stop loss order.

WHERE IS THE BEST PLACE FOR PLACING A STOP LOSS ORDER?

No trade wants to get stopped out prematurely. The quest for finding the best stop loss placement levels is a quest like searching for the holy grail of forex trading  as well.

But having said that, what I have found and continue to find is that there are only two best places for placing a stop loss.

If you want to know more, I have writing a post explaining this, click this like and you’ll be taken there: The Only 2 Best Places to Place Your Stop Loss Order

 

WILL USING STOP LOSS ORDERS MAKE YOU A PROFITABLE FOREX TRADER?

This simple answer to this question is this:using stop loss orders in the forex market does not guarantee that you will make money in forex trading.

Forex trading success is a lot more than just placing stop loss orders. It is however a necessary part of the risk management process.

The key to successful forex trading is making a lot more trading profits compared to your trading losses.

In fact, FXCM analysed a data of 12 million live trades and found out that the number one reason  why forex traders fail in forex trading was due to having bigger trading loses  than profits.

And the amazing thing was this: these traders were more than 50% right when they placed these trades. So being right in your trade even 90% of the time means nothing if your trading loses are huge and your profits are small on those 90% of the wining trades.

So if you have huge trading losses due to the fact that your stop loss orders are wide and if your profits are very small compared to your trading loses, you are going to blow your forex trading account, whether you like it or not.

 

CONCLUSION

Now you understand how to use and trade using a stop loss order. Remember, a stop loss order is about managing your trading risk.

Think of stop loss orders as insurance policy and it protects your trading account from being wiped in case of price moving against your trading position.

Fast and adverse price moves can “jump or skip” your stop loss orders which can make you suffer massive trading loses.  So if you are want to find a forex broker with a guaranteed stop loss, then good luck with that.

Some traders are born with an innate discipline. Most have to learn it the hard way.”J. Welles Wilder Jr

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