What is a stop loss order? Where is the best place to place a stop loss order? In this post, I will:
- give you the two best places to place your stop loss order so that you won’t get stopped out prematurely.
- definition of stop loss order
- why place a stop loss? The importance of stop loss orders
Have you ever placed an order and then price goes to your stop loss order, takes you out of your trade then goes in the direction you anticipated in the first place?
I know the feeling…it’s frustrating!
Chances are that you’ve placed your stop loss too close to the market price which didn’t given enough room or breathing space to the price movement.
Every trader knows these two things:
- in a downtrend market, price moves up and then goes down. These are called upswings in a downtrend.
- in an uptrend market, price moves up then goes down. These are called downswings in an uptrend.
Understanding these two facts mentioned above can make a huge difference to your trading especially when it comes to placing stop loss order on your trades because if you place a stop loss order too close, you will get stopped out prematurely and then the trade goes in the direction that you thought it would go in the first place.
What Is A Stop Loss? Definition Of A Stop Loss Order
A stop loss order is simply a pending order that is placed to get you out of a trade at a certain price IF that trade is turning into a loss.
- In the forex market, for a buy order, the stop loss order will be pending sell order that will close your trade if the price falls below your entry price.
- for a sell order, your stop loss order will be a pending buy order that will close your trade if the market reaches a certain price level above your entry price.
A stop loss order is simply a trading risk management strategy.
How To Place A Stop Loss Order
For forex traders that are just now learning about forex trading, here’s how to place a stop loss order:
- So if you place a buy order, then you have to place a stop loss order under the entry price of your buy order. If price moves down and your stop loss is hit, you will have a losing trade. That stop loss protects your trading account from losing a lot of money.
- similarly, if you place a sell order, your stop loss is place above the entry price of your sell order. If price moves up and hits your stop loss, you rill have a losing trade.
Why Place A Stop Loss Order? The Importance Of A Stop Loss Order
Trading without a stop loss order is like jumping out of a plane with no parachute on. When it comes to placing stop loss, you want to be able to place it in a location that is:
- far away from the market price as possible (without increasing your risk)
- so that this allows the market to breathe without your stop loss getting stopped out
2 Best Places To Place A Stop Loss Order
The best two places to place your stop loss orders are resistance levels and support levels.
To break this down further, they would be the:
- recent swing high
- recent swing low
For a buy order, you place your stop loss order just behind the recent swing low.
For a sell order you place your stop loss order just behind the recent swing high.
If you don’t know what a recent swing low or recent swing high looks like, then keep reading…
Definition of Recent Swing High Price Pattern
- The most recent swing high is a resistance level
- It is a level where you will see price will go up but than fall back down from there because it couldn’t continue to go up anymore.
- The fact that price fell down from that level means that it is a safe spot to place your stop loss order just behind it if you take a short trade.
Definition of A Recent Swing Low Price Pattern
- the most recent swing low is a support level
- The most recent swing low will be a price level where you will see price will go down but then rise up from there as it cannot go down anymore.
- The fact that the price rose up from that level means that it is a safe spot to place your stop loss order just behind it if you take a long trade.
Stories of Traders Losing Their Trading Accounts With No Stop Loss
There are stories of traders busting their trading account because they did not utilize stop loss, here are few examples:
- How One Man Lost $500,000 Trading CFDs
- Account got wiped out during news break
- Beginner trading without a stop loss horror story
I’m sure there are many more similar stories like these given above. If you wan’t to trade without a stop loss, its really up to you.
For my case, trading with a stop loss is about keeping my peace of mind. I can go to sleep knowing that if market goes against my trade, I will only lose what I planned to lose in a trade anyway.
What do you think?