Stop Loss Facts
If you need to know about how to use a stop loss and cut through all the technical jargon.
You’re looking for facts and an actual write up that makes sense you are in the right place.
A stock market trading stoploss is a specific point of loss that you want to close and get out of the market before the stock drops even more.
In this article, I will cover the following topics.
- Buy Stop Loss
- Sell Stop Loss
- Trailing Stop
- Guaranteed Stop
- stop-loss order
- Don’t Move your stop.
A stop loss isn’t a guaranteed stop at that level, if there is a large spike in price your broker will need to action the order to sell or buy which ever you are holding there will be a slight delay so may close at a higher or lower price than you expected.
Check your brokers terms and conditions for more info.
General Info On Stops And Stop Losses
- What is it?
- How does it work?
- Do I need one?
- Which one should I use?
There are a few different ways to use a stop loss, Trailing stop, guaranteed stop or the standard stop.
Don’t worry and fret over it grab a brew and a pen and paper. I will explain all this and more in my article when you get back.
So let’s begin all stops were created equal to help save your capital be it a profit or a loss situation.
Take it from me your account balance could be wiped out in minutes with a runaway trend in the opposite direction without using one.
I made that mistake not just once a few times then realised I needed to treat this a business.
I read books watched youtubers tried to implement strategy after strategy until I started trading profitably.
How you as well, it all comes down to planning again you need one to succeed in doing anything you set out to do.
FAIL TO PLANPLAN TO FAIL
So please read on if it even this stop loss info saves you £5 I would be over the moon.
Stop loss Buy Positions.
A buy stop loss is a position that you wish to close your trade if the price falls a specific amount from your opening price. With some CFD Brokers you can open a Guaranteed Stop there is usually an extra charge for this or the spread is more significant make sure you check before opening.
A stop-loss can be Initiated at any time, but its best to have it set up before you even decided to open a position.
This is because you need to know your potential loss on every trade so you can decide on your potential gain.
Never open a Buy position on a whim always stick to a strategy.
Stop Loss Example Buy
You Proceed to open a long position at $39.53 thinking it’s going to skyrocket and you’re going to become the next Elon Musk.
But just in case it’s not going to be this time round you place a stop at where your strategy tells you to maybe the last low, or a support and resistance line that will then become where your position will close.
You must protect your capital and create a stop a level which you decided enough is enough. I cannot let this loose me any more money.
Sell stop loss
The only real difference between the sell stop loss and buy is that you are opening a position to trade in the opposite direction you are hoping for the price to fall.
You would place the stop higher than your opening rather than below.
Sell Stop loss example
Your strategy tells you the market is going to fall.
You take a look at the price of West Texas Intermediate oil is at $42.99 you open a sell position.
To be on the safe side, you take a look at the charts, and the last high was $43.19 so you set your stop just above that.
If the stock makes a massive jump and you where wrong the market won’t necessarily close at $43.19.
It could be higher as you have what is called slippage, but you have saved your capital so you can trade another day that’s why we use a stop loss.
A stop-loss will get called at the level you choose if natural market movements are happening.
A trailing stop is just as it sounds its an alternative to fixed level stop as above.
If you open a long/, buy position, and the stock starts climbing the stop follows the same direction until the price reverses and drops 20 pips then the position will close you can set the number of pips to whatever you want from one to 1000 if you wanted to.
Some people swear by them as it takes a lot of the stop loss pressure away from trading when to call a position because if the market had a massive spike says 100 pip straight up but then dropped 130 pips.
On a standard stop you would have lost 20 pips but using a trailing stop you would have gained 80 pips as it would of closed 20 pips below the high.
Before you go running off to try this method, make sure you do some back testing and see what would happen as with all things to do with the stock market, it doesn’t work every time.
Trailing Stop Example
Say you work out your stop loss with a fixed loss of 20 pips. I.e. price is $32.60, and your stop is $32.40 that 20 cent gap is called a pip when trading.
Instead of setting a fixed stop loss, you set a trailing stop if the value goes up to $32.61 from $32.60.
Your pip gap would stay the same at 20, but the stop would now be £32.41.
If it then jumped to £32.69, your stop level would increase accordingly to £32.49.
So If the market then dropped to £32.49 or below the position would close; thus, your loss would be 11 pips, not the original 20 pips.
As the name suggests once you have decided on your stoploss you can sometimes set a guaranteed stop this closes at the exact price you specify.
There will be an extra charge involved so please check with your broker for more information.
Stop Loss Order
A stoploss order intertwines with the above, its all about protecting your capital. a stop loss order is a call that you decided.
If its gone through a pivot or reached a new high something that lines up in your strategy sell at this point you can set an order stop to close part of the order if it comes back to this point or a point you have set. Its totally adjustable and you can set it wherever you want.
At this point you could even open a trailing stop to keep some of your profits.
Don’t Move Your Stop Loss.
One of the worst things to do while trading is to see the stock falling or rising towards your stop-loss and think you are still in the right of course I am I wont loose here i’m a trading king.
I will move it another 10 pips its will be ok or even worse I will just remove the stop as it might spike it’s going to head back in my direction again.
Just don’t do it wont be part of your strategy so don’t change it.
But nine times out of ten, it will just keep going and take out your stop, you could even keep on moving and moving ultimately losing your account balance.
I hope I have given you a bit clarity on stop losses and how to use them ultimately you need to create a robust trading plan back test and back test again until you know how it works and how to trade for yourself.
you loose you capital you loose you chance to trade for a living.
I don’t know who said it but its true give a man fish he can feed his family today, teach a man to fish and he can feed them forever.