On the best CFD trading platforms, you can place an order called Stop Loss, which allows you to set a maximum limit for any loss from a trade.
Therefore, in this lesson we will see What is Stop Loss and how to use it.
What does Stop loss mean?
For example, if you open any position on an asset, you can activate a One-Level Stop Loss, after which the position will automatically close, effectively blocking further losses. This is an automatic trading function (since it is activated automatically), but it must be set manually.
This means that if the loss limit is not set manually, the position will not be closed automatically. Obviously, even if you set the loss limit, there will always be a possibility to manually close the open market position. You can open a demo account with IQ Option from here to practice.
It is advisable to always set the stop loss, especially when trading in highly volatile markets.
Stop Loss: How to place and where?
To understand how to place the stop loss it is necessary to first know in which direction the prices are expected to go in the future. Therefore, the level of invalidation of the strategy should be positioned on the opposite side. An example will clarify what has been said so far.
Let us look at a practical example.
Let’s assume that we have carried out an analysis of the EUR/USD exchange rate. Let’s assume that the EUR/USD exchange rate is 1.1100. Therefore, we decided to implement a long strategy based on current prices (“market” entry order). At this point, it will also be necessary to position the stop loss level to protect our capital in case prices go in the opposite direction.
In addition, based on our analysis we decided that the $1.1090 level is the level at which, by going down, would invalidate our upward view on the exchange rate. Therefore, the stop loss should be placed at this level. We now have the entry level at 1.1100 and the stop loss level at 1.1090, i.e. 10 pips below the trade load price.
This way, if things go well the stock market will rise giving us a profit. If the prices had a downward change until touching the stop loss level, the position would be closed in loss. Therefore the risk of suffering a greater loss than the one that was predetermined before implementing the trade can be avoided.
The above example refers to the Forex market, but the concept remains the same even if you want to trade stocks, commodities or stock indices.
How to place Stop Loss on the Trading Platform?
Next, let’s look at how to place a stop loss on a trading platform. We will take the IQ Option platform as an example, as it is very intuitive and therefore excellent for this tutorial.
Let’s assume that you open an upward position on the EUR/USD. In the search engine we select Forex and then click on the EUR/USD button to display the chart. You can see it below.
Then, clicking on EUR/USD will take you to the chart window for positioning the order, which looks like this.
Now, in addition to choosing the amount or quantity of dollars in which to trade (we can take it to a maximum of 10,000 with a margin requirement of a few tens of euros), we can also set the Stop Loss. To do this, click in the right column on the “Auto Close” section.
Here, in the field “When loss is”, you can insert a value in % or in dollars to establish the amount of money you are willing to lose if the operation does not turn out as you have thought.
To open the position, simply click the “Buy” button.
How to place Stop Loss on an already opened position?
In addition to applying it to a position that has yet to be opened, Stop Loss can also be applied to a position that has already been opened.
It is in effect a modification of an order. On the best trading platforms, this option is always available and does not require any additional cost.
In IQ Option, for example, in order to apply a Stop Loss to an already opened position (maybe because you forgot to apply it at the beginning), you can proceed in two ways:
Clicking on the “TOTAL PORTFOLIO” button in the left column will open a tab like the one you can see in the image below:
By clicking on the position where you want to place the Stop Loss, a section will open where you can insert the desired value in the “When loss is” field
The modification operation for adding Stop Loss does not differ from the view previously for opening the position. Once the Close at Loss is set, you can click “Apply”.
Change Stop Loss already entered
In addition to adding a Stop Loss to an already open position, you can also modify the Stop Loss already entered.
Then, in case you decide to increase or decrease the Stop Loss, you can do it proceeding as seen in the previous paragraph. The procedure is identical.
Types of Stop Loss
There are several criteria to calculate Stop Loss, but there is no universal or better way to do it. The important thing is to understand the risk you are taking once you choose where to place your Stop Loss. Learn how to place your Stop Loss using the IQ Option practice demo account by clicking here.
There are several types of stop loss, the main ones are :
- Stop Loss in percentage
- Monetary stop loss
- Stop Loss based on candlestick patterns and graphical figures
- Stop Loss according to technical levels (static and dynamic supports and resistances)
- Volatility based stop loss (using the ATR indicator).
Stop loss in percentage
Stop loss in percentage implies the exit of the position after the underlying has moved against our direction by a percentage predetermined by the trader.
Monetary stop loss
The monetary stop loss is a type of order that is based on the monetary loss incurred in a given transaction. For example, the trader may decide to close the position after suffering a predetermined monetary loss.
Stop loss by chart patterns
Stop loss based on candlestick patterns and chart patterns are those levels of trade invalidation that are based on the conformation of particular candlestick patterns (e.g. Hammer, Shooting Star, Engulfing , etc.) or on reversal or continuation chart patterns (double top, double bottom, head and shoulders, triangle, etc.).
Stop loss by technical levels
Stop loss based on technical levels uses static or dynamic supports and resistances to identify the most suitable level that would invalidate the existing operation. These can be, for strategies that raise horizontal or dynamic supports, for strategies that lower static or dynamic resistance levels.
Stop loss due to volatility
The stop loss based on volatility is the one that is considered more “secure” than the previous ones. Positioning the order based on volatility allows prices to have “breathing room”. This prevents them from stopping prematurely due to temporary adverse price movements. This stop loss is traditionally set by the 14-period ATR indicator.
The 3 rules of stop loss: how to place it intelligently?
It is not enough to know how important the stop loss is ; it is essential to know the basic rules to place it in an intelligent and profitable way. You can practice positioning your stop loss with the IQ Option demo that you can get for free here.
Here are the 3 rules for setting stop loss in the best way.
Rule #1: Select an accurate entry price
You should never enter into a trade with a random price, but study an entry price and only enter the market at that time.
In this way, you can place the stop loss at a short distance from the entry point, where prices can reach only if the analysis that was made of the market was wrong. The order, therefore, allows you to leave with little damage, re-analyzing the situation, and possibly return to a more favorable price.
Rule #2: Calculate the stop loss
You have to decide beforehand which capital you want to risk (in terms of pips or money). It is very important that the stop loss is less than the expected profit of the trade. In other words, the exit price with loss must be closer to the market entry price than the exit price with profit.
Rule #3: Build the trading plan before you trade
Analyze and select in advance the entry and exit prices both in loss and profit. Always study and analyze the state of the market and avoid impulsive entries in the market or based on poor information.
The study phase should precede the trading phase. When you place an order, you should have the mental freedom to turn off the computer and not follow the subject for hours. Stop loss and take profit should give you the assurance that you have traded in the best way. Your actions to follow can cause more damage than they can bring.
Why calculate Stop Loss?
A position could be automatically closed without Stop Loss only if the broker does not foresee debit situations and therefore close all positions unilaterally. However, not all brokers provide for this procedure. The IQ Option broker does not allow you to exceed the available capital on the account and does not expect the trader to go “red”.
Go to Lesson 4b – Stop Limit (Take Profit), what it is used for and how to use it
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