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What is Stop Loss? Things to know when trading

Risk management is extremely important when trading forex or stocks. A good trader will make the most of trading tools and orders. In particular, Stop Loss is an order favored by many investors, used to promptly cut losses and minimize risks. So what exactly is Stop Loss and what should you keep in mind when placing this order? Join Learn Forex Trading to find out right here!

What is Stop Loss?

SL is a function that the broker provides to traders to limit losses
SL is a function that the broker provides to traders to limit losses

In stock investing, Stop-Loss (SL) is an order set with a stop-loss price, specifically to sell securities at a predetermined price. This order helps limit the loss of a certain buy or sell order. When the market price reaches the preset price, the order will automatically close.

Similarly, in forex, SL is a function that the broker provides to traders to limit losses, especially when the market goes against investors’ predictions. 

See more: Learn sell stop to increase success rate

Meaning of Stop Loss Order

The Stop-Loss order plays an extremely important role for traders because no one can predict 100% of future market developments. Even if you have a specific plan and strategy, no matter how deep your experience, the market can still suddenly turn upstream. Therefore, every transaction has both profit potential and potential risks. Sell stop-order orders are used to minimize risk. 

Usually associated with a Sell Stop Order or Sell Stop Limit Order. Specifically:

  • Sell ​​Stop Order : will be matched when the market price reaches the set price. This price will be lower than the market price and is used when it is predicted that the market will decline sharply, breaking the support level. 
  • Sell ​​Stop Limit Order : Is a sell limit order, activated if market price >= limit price. This order is used when you predict that the market will decline sharply. The essence of Sell Stop Limit is a combination of Sell Stop Order and Sell Limit.

=> Stop loss orders help limit risks when the market drops and then begins to reverse and increase.

Classification of Stop-Loss Orders

Stop-loss orders are divided into two types:

  • Stop loss sell order: Used to automatically close sell orders when the price increases to a price corresponding to an acceptable loss.
  • Buy stop-loss order: Used to automatically close buy orders when the price drops to a level corresponding to the pre-calculated loss.

Stop Loss placing strategies.

The most popular Stop Loss placing strategies
The most popular loss-placing strategies

Below are strategies that traders should apply to place stop-loss orders in forex trading:

Set fixed Stop-Loss

Traders can place SLs at a fixed price and do not change until the market price reaches this mark. At its simplest, traders should use the lowest risk/return ratio of 1:1, Which means the SL and TP levels will be different from the order price by about the same amount of pips. 

Set Stop Loss according to the indicator.

You can rely on an indicator to set SL, such as ATR (Average True Range). For example, a trader places an SL 50 pips away and a Take Profit 100 pips away. If the market is a bit sleepy, 50 pips is considered too big. As for the highly volatile market, 50 pips is considered too small. Using the ATR indicator will help you accurately analyze the market, to manage risk.

Move Stop-Loss manually.

When their position is profitable, they can move the SL level to maximize loss control. For example, you place a sell position order. When the price moves lower, beneficial to the position, the trader can lower the SL level. If the trend reverses, the position will close automatically.

What are the advantages and limitations of a Stop Loss order?

Let’s see what are the benefits of using SL and what are the weaknesses of this type of order?

Advantages of Stop-Loss orders

Stop Loss orders help traders maintain expected profit and risk
Stop-loss orders help traders maintain expected profit and risk
  • An SL order is an order that is automatically executed when the market price reaches a pre-set level by the trader.
  • Helps traders reduce losses, with losses limited to an acceptable level. At the same time, they do not have to go into a state of stress.
  • Helps traders maintain expected profit and risk levels. Besides, sell-stop order orders help them control emotions in case of strong market fluctuations.

What are the disadvantages of placing a Stop-Loss order?

  • Risk when the market fluctuates in the short term: If the trader sets a short-term sell limit, the order will be matched before the price increases again. This causes investors to lose a relative profit.
  • Need to clearly determine the SL price: To place a stop-loss order, the trader needs to calculate the appropriate limit buy price and sell price. This is not easy and requires specific analysis.

The simplest way to place a sell stop order order on MT4

The simplest and most common way is to set the SL level on the order window. 

With starting orders placed:

  • In the order placing dialog box, after selecting the order type and entering volume information. In the Stop Loss section , you just need to select the up and down arrows to adjust the stop-loss price or enter the level you want. 
Adjust the Stop Loss level in the order dialog box
Adjust the Stop Loss level in the order dialog box
  • If you set the stop-loss price too close to the current price, the message “Invalid S/L” will appear.

For previously placed and unmatched orders, if you want to add or change the stop-loss level, you need to:

  • In the Terminal window, all positions are open in the Trade tab. You just need to right-click on the order you want to add or edit the SL price. Then click “Modify or Delete”.
  • In the Stop Loss box, re-enter your calculated stop-loss.
Re-enter the Stop Loss level in the Modify Order box
Re-enter the Stop-Loss level in the Modify Order box
  • Click “Modify” to complete the change. At this time, the new SL level will be automatically updated on the Terminal window.

Or you can change or add a quick stop loss level by using the mouse to drag the SL line to the target price on the chart.

See more: Instructions for registering an XTB account on the phone

Things to keep in mind when placing a Stop Loss order

Stopping loss orders helps traders manage risk extremely well. However, many traders can still make mistakes when using these orders.

Place a Stop Loss order at a price that is too close

At this time, the loss will be the lowest. However, if the market turns against the trend, you will miss out on a large profit. Please consider calculating to set a reasonable SL level according to the resistance/support zone so you don’t have to regret it.

Place a Stop Loss order at a price that is too far away

When the SL price is set too far from the buy price, you will have to bear a relatively large loss. Therefore, 1 is to avoid losses, 2 is to set the SL price not too far away. Know the right time to stop instead of trying to hold on and then cut painful losses.

Move the Stop-Loss mark.

When traders see the price going against their expectations, they move the SL level to avoid being swept. However, there are always surprises in the forex market. Sometimes, moving the SL price mark will cause you to lose more. Therefore, be steadfast with the original strategy, and don’t be shaken by the short-term changes ahead.

Epilogue

Above, Learn Forex Trading has provided you with the information you need to know about Stop Loss . Hopefully this knowledge can help you when placing orders. Take advantage of Stop Loss orders to promptly cut losses and minimize risks in forex trading. 

FAQ

Why do traders need to learn and use Stop-Loss?

Stop-Loss has many meanings in trading. However, in short, the forex or financial investment market is always volatile. Nothing is certain, so the SL level will be a tool to help you minimize risk. 

Is it okay to have Stop-Loss scanned a lot?

When the market price touches the SL price, the system will close the open position. This helps you only suffer a certain loss with one failed transaction. However, being exposed to a lot of stop limit checks will make traders worried or lose their composure. This is also a wake-up call that traders need to practice more on Demo accounts.

Should I set my Stop-Loss further to avoid being swept too much?

In general, setting SL is still subjective. Many traders want to make small profits, placing SL only a few pips away from the current price. If the market fluctuates a few dozen pips, the stop-loss order will be swept immediately. Therefore, many traders boldly set the SL level further, but that means being subject to more impact from the market. You need to consider your tolerance level and the capital you have.

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