Every trader dreams of having an efficient Plan B that would limit his or her risks. A stop-loss order may turn out to be that anticipated exit plan that will eventually prevent you from losing money. The concept is pretty simple. Traders set an exit point at a certain price level protecting them from unexpected risks.
In truth, it is not that easy. For example, if you set it too far, you will inevitably suffer from huge losses. Setting the exit point too close means high chances of being kicked out of a position very fast. So, how to set a stop-loss order with minimum risks and maximum profit perspectives? Read the article to learn more about stop-loss strategies, setting methods, alternatives, and other crucial issues that are vital for both beginners and pro traders.
What Is Stop Loss Order?
As you have understood from the introduction section, a stop-loss order is an entry point for traders who want to sell instruments as soon as they reach specific price levels. The main idea is to minimize potential losses and keep up with the most secure market positions. Below you can see a simple stop-loss illustration example, where stop loss is located under the current price and take profit level, preventing from losing money if the price reveses too much.
Usually traders are not ready to losing more than 10% of the initial asset price. So, you will probably would like to set the stop-loss order 10% below the existing price level to limit the potential loss by 10% only in case of negative price action.
Stop Loss Order Types
Of course, it would not be for trading if it was that simple. Before setting, you need to consider several stop loss order types and define which one meets your particular trading strategy.
- Market Orders – a stop loss market order is the most common type that applies to the price that reaches $19.50 either it is an ask, bid, or last price touch. However, if there is no one eager to buy the asset, a trader can end up at lower price level. The situation is also known as slippage. On the other hand, it will hardly happen in case you trade an asset at high volumes.
- Limit Orders – this stop-loss type acts in a different way. Once the price has reached a specific level, your broker automatically sends the limit order. It results in closing a position at a pre-defined price or even a better price.
Note: The difference here is that the first type closes the position at any price level while limit orders eliminate the negative consequences of slippage making the stop loss more effective and sometimes even profitable. In other words, trading with a trusted broker prevents you from price changes moving aggressively towards you.