A stop loss is one of the most important order types in trading.
In this tutorial, I'll go over what a stop loss order is, how to implement it, and I'll answer some frequently asked questions at the end.
After you read this tutorial, you'll know everything there is to know about entering a stop loss.
What is a Stop Loss Order?
All trading platforms that I've seen have a stop loss feature.
Some are easier to use than others, but the basic function is the same.
A stop loss order is a type of order that traders use to limit their loss on a losing trade or lock in profits on a winning trade.
To be more specific, a stop loss is a pending order that only gets executed if price hits your stop loss level.
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A pending order is an order that sits on the broker's server until the conditions of the order are fulfilled. In the case of a stop loss, that condition is price hitting the stop loss price.
Once price hits your stop loss price, it turns into a market order, which means that it will execute the trade at the next available opportunity.
That means that there has to be someone in the market who is willing to take the other side of your trade.
In very large (liquid) markets, the trade usually gets filled very quickly and at the price you set. Some examples of markets are large cap stocks, Forex and large cap cryptos like Bitcoin.
However, in small (illiquid) markets, the price that your trade finally executes at might be different from the price that you set your stop loss at. This is called slippage. Some commonly illiquid markets are options, micro cap stocks and altcoins.
If you're trading in an illiquid market, find out if you can enter a stop loss that turns into a limit order instead of a market order.
A stop-limit allows you to set a limit price so you won't lose money if the only available trade is at a price that worse than your limit price.
Not all trading platforms offer stop-limit orders, so be aware of potential slippage before place your stop loss orders.
Traders usually enter a stop loss at the same time that they open a trade.
How to Place a Stop Loss to Limit Losses
The most common use of a stop loss order is to do as its name suggests.
It will limit the loss that you have on a trade.
In the chart above, the red line at the bottom of the chart represents a good place to enter a stop loss order for a long trade.
The trade would be entered at 0.63264 and the stop loss would be at 0.61617.
If price goes lower than 0.61617, then the long trade will be closed.
A stop loss order allows a trader to automatically exit a trade at a predetermined amount of loss, thereby protecting the rest of their trading capital.
Many traders use a percentage loss stop loss which risks only X% per trade. A common amount to risk per trade is 1%.
If you risk 1% per trade, you would have to be wrong 100 times in a row to lose all your money.
Even if you were just guessing, I don't think that you could be wrong 100 times in a row.
Therefore, using a stop loss protects your capital when you're wrong, so you'll be able to take advantage of the times when you're right.
How to Use Stop Losses to Protect Profits
You can also use a stop loss to protect profits.
Let's take a look at the same trade above, but this time, price has moved into profit.
The blue line is the trade entry price and the red line is the new stop loss level.
To protect your profits, you could move your stop loss up to 0.63634, locking in 37.4 pips of profit on the trade.
Moving your stop loss to lock in profit is a great way to ensure that you'll make money on the trade, but also gives you the opportunity to make even more money if the market locks into a strong trend.
Regardless of what happens though, you'll have peace of mind knowing that you've locked in a guaranteed profit.
How to Place a Stop Loss Order on Popular Trading Platforms
Stop loss orders are usually easy to place.
All trading platforms allow you to place a stop loss when you enter a trade. After you enter a trade, you can also edit your stop loss, or enter one if you forgot.
I'll give you a few examples from different trading platforms, so you can see the process in action.
How to Place a Stop Loss in MetaTrader
The MetaTrader order entry screen has a stop loss field just below the volume field.
An easy way to enter a stop loss price is to first click either the up or down arrow next to the stop loss price.
This will automatically enter a price that's close to the current price. Then you can manually edit the price to set your stop loss.
Using this method will save you time and is particularly useful for day traders who need to enter orders quickly.
The process is almost exactly the same in MetaTrader 5. If you want to learn how to set a stop loss and take profit in MT5, read this tutorial.
How to Place a Stop Loss in TradingView
TradingView has the best stop loss screen that I've ever seen.
It allows you to set a stop loss in pips/dollars, at a certain price, or by percentage risk.
To enter an order, right-click on any chart and click on:
Trade > Create new order…
Then the order entry box will appear. Check the box next to Stop Loss and enter your stop loss in your preferred format.
Finally, click on the Buy or Sell button and your order is placed.
How to Place a Stop Loss in thinkorswim
TD Ameritrade has a couple of different trading platforms that you can use, but I'll show you the thinkorswim example because it's the simplest.
Entering a stop loss is pretty complex on this platform, but it's easy once you know how to do it.
While you're entering your entry order, click on Advanced Orders > 1st trgrs OCO.
This will enter a stop loss order once your trade gets filled.
To get a complete tutorial on how the platform works, watch this video.
It shows an older version of the software, but the core principles are the same.
Yeah, I don't know why they make it so complicated.
But now you know how to do it.
How to Place a Stop Loss in Binance
The process of setting a stop loss order in cryptocurrency can vary greatly by exchange.
In this example, I'll show you how to use Binance because it's one of the most popular exchanges.
On Binance, you'll be using the Stop-limit function.
Although this example will be shown on Binance, check with your specific exchange on how to set a stop loss on your trading platform or exchange.
Here's a complete tutorial on how to set a stop loss on the Binance trading platform.
Where Should You Place Your Stop Loss?
Now that you know how to place a stop loss, this is the next question that new traders ask.
Knowing where to place your stop loss comes with practice.
You want to put it in a place where it won't be triggered by normal market fluctuations.
But you also want to set it as tight as possible to make maximum return on your trade.
It's a balancing act.
To learn where to place your stop loss, read this tutorial.
Should You Move Your Stop Loss?
Moving your stop loss to increase your risk means that you'll have a bigger loss than you originally planned for.
That's a recipe for disaster.
There is only one situation when you should move your stop loss…when you want to lock in profits.
How you do this is beyond the scope of this tutorial, but you can learn how to trail you stop loss here.
When you trail your stop loss, you might make way more profit than you would have expected because you are letting your winners run and cutting your losses short.
Do Brokers Hunt Your Stop Loss?
Legitimate, regulated brokers will not hunt your stop losses.
Who knows what dodgy, unregulated brokers do.
That's why it's important to trade with a reputable broker.
But if you're trading with a reputable broker and you feel like your stop losses are getting picked off, then this is probably the reason.
Final Thoughts
Once you understand how to set a stop loss order in one market, you'll know how to figure out how to do it in other markets, even if the process isn't exactly the same.
Using a stop loss on your trades is the best way to limit your risk and lock in your profits. If you haven't been using stop losses, then you should really consider using them.
In all fairness, not all professional traders use stop losses.
There are also some trading strategies that perform better when you don't use a stop loss.
But the vast majority of traders and trading strategies perform better with stop losses.
So get to backtesting and figure out the best method for placing your stop loss orders.
Related Articles
- How to Calculate a Stop Loss
- How to Use a Trailing Stop Loss (7 Ways to Lock in Profits)
- Is Your Stop Loss Too Tight? Here’s How to Find Out
- How to Find the Best Place to Set Your Stop Loss
- How to Trade Forex Without a Stop Loss
- Advantages of Forex Hedging vs Stop Loss
Introduction
As an expert in trading and order types, I can provide you with comprehensive information about stop loss orders. I have a deep understanding of the concepts and strategies involved in trading, and I can guide you through the process of implementing stop loss orders effectively.
What is a Stop Loss Order?
A stop loss order is a crucial order type in trading that allows traders to limit their losses on losing trades or lock in profits on winning trades. It is a pending order that gets executed only when the price reaches a specified stop loss level. Once the price hits the stop loss level, the order is converted into a market order and executed at the next available opportunity.
It's important to note that in large and liquid markets like large cap stocks, Forex, and large cap cryptocurrencies such as Bitcoin, stop loss orders are usually filled quickly and at the desired price. However, in small and illiquid markets like options, micro cap stocks, and altcoins, there may be slippage, which means the execution price may differ from the stop loss price.
To mitigate the risk of slippage in illiquid markets, some trading platforms offer the option to enter a stop loss that turns into a limit order instead of a market order. This allows traders to set a limit price to avoid losing money if the only available trade is at a worse price than the limit price.
How to Place a Stop Loss to Limit Losses
To limit losses, traders commonly enter a stop loss order at the same time they open a trade. The stop loss level is determined based on the trader's risk tolerance and analysis of the market. By setting a stop loss, traders can automatically exit a trade if it reaches a predetermined amount of loss, protecting their trading capital.
Many traders use a percentage loss stop loss, which limits the risk to a certain percentage of their trading capital per trade. A common amount to risk per trade is 1%. By risking only 1% per trade, a trader would have to be wrong 100 times in a row to lose all their money. Setting a stop loss helps protect capital when trades go wrong, allowing traders to take advantage of profitable opportunities.
How to Use Stop Losses to Protect Profits
Stop losses can also be used to protect profits. When a trade moves into profit, traders can adjust their stop loss level to lock in some of the gains. By moving the stop loss level closer to the entry price, traders ensure that even if the market reverses, they will still exit the trade with a guaranteed profit.
Moving the stop loss to lock in profit not only protects the gains but also provides the opportunity to make even more money if the market continues in a favorable direction. It's important to strike a balance between protecting profits and giving the trade room to potentially capture more gains.
How to Place a Stop Loss Order on Popular Trading Platforms
Different trading platforms have varying methods for placing stop loss orders. Here are examples of how to place a stop loss on popular trading platforms:
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MetaTrader: In MetaTrader, the stop loss field is located below the volume field in the order entry screen. You can click the up or down arrow next to the stop loss price to automatically enter a price close to the current price, and then manually adjust it to set your stop loss.
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TradingView: TradingView offers a user-friendly stop loss screen. Right-click on any chart, click on "Trade," then select "Create new order." Check the box next to "Stop Loss" and enter your preferred stop loss value in pips/dollars, at a certain price, or by percentage risk.
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thinkorswim: thinkorswim, provided by TD Ameritrade, allows you to enter a stop loss order once your trade gets filled. While entering your entry order, click on "Advanced Orders" and select "1st trgrs OCO" to set a stop loss order. The process may seem complex initially, but it becomes easier with practice.
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Binance: On Binance, you can use the Stop-limit function to set a stop loss order. The process may vary on different exchanges, so it's essential to check with your specific exchange or trading platform for instructions on setting a stop loss.
Where Should You Place Your Stop Loss?
Determining the ideal placement for a stop loss requires practice and understanding of market dynamics. The goal is to set the stop loss at a level that won't be triggered by normal market fluctuations while still allowing for maximum returns on the trade. It's a balancing act that depends on the trader's risk tolerance, market analysis, and trading strategy.
To learn more about where to place your stop loss, I recommend reading tutorials and educational resources specific to your trading style and market. These resources can provide valuable insights and techniques for determining optimal stop loss levels.
Should You Move Your Stop Loss?
Moving your stop loss to increase your risk is generally not recommended. Doing so can result in larger losses than originally planned, which can be detrimental to your trading capital. However, there is one situation where moving your stop loss is appropriate: when you want to lock in profits.
Trailing your stop loss is a technique that involves adjusting the stop loss level as the trade moves in your favor. This allows you to protect profits and potentially capture more gains if the market continues to trend in your favor. Trailing stop loss strategies can be beneficial, but they require careful consideration and understanding of market conditions.
Do Brokers Hunt Your Stop Loss?
Legitimate and regulated brokers do not engage in stop loss hunting. However, it's important to trade with reputable brokers to ensure the integrity of your trades. Unregulated brokers may engage in unethical practices, including manipulating prices to trigger stop losses. Therefore, it's crucial to choose a reputable broker with a solid reputation in the industry.
Final Thoughts
Understanding how to implement stop loss orders is essential for managing risk and protecting profits in trading. While the process may vary across different markets and trading platforms, the core principles remain the same. Stop losses provide traders with a valuable tool to limit losses and secure gains, allowing them to navigate the markets with confidence.
It's worth noting that not all professional traders use stop losses, and some trading strategies may perform better without them. However, the majority of traders and trading strategies benefit from the use of stop losses. To determine the best method for placing stop loss orders, it's recommended to backtest different strategies and find what works best for your trading style.
Remember, practice and continuous learning are key to becoming a successful trader. Stay informed, explore different strategies, and adapt your approach as you gain experience in the dynamic world of trading.
