In this article we talk about one of the popular methods of managing risk – setting a stop loss. We talk about how to set it up, when it’s useful but also the disadvantages of using one. We hope you find this useful.
What is a stop loss?
A stop loss is a setting you can apply to your trading account to ‘automatically’ sell the holding when it gets to a particular price level. (You can also sell a portion at a particular price using limit orders, but that is not covered in this article). The stop loss is used to control and limit the risk of a trade. The set up is typically done at the outset of placing the trade. It therefore removes the emotion involved in making a decision at a point when a trade is going against the trader. Stop losses are not guaranteed unless a ‘guaranteed’ stop loss is used, for which an additional premium will likely be payable.
The stop loss can be set from any platform but also Trading View – the charting software we are using.
Typically traders have an idea of where to get in and out of a trade in the event it goes for or against them. The stop loss can therefore be set to coincide with this initial decision.
Advantages
- A stop loss removes the emotion of making a decision at a point in time where the markets are against you and you feel stressed and fearful of losing money;
- It can be set up at the outset of placing the trade to coincide with the overall plan for the particular trade – and it assists traders in ‘sticking to the plan’;
- It will activate when the trader is offline – so if trades are being held overnight, the stop loss will trigger in the event the price starts trending against the trader and it’s reached the trader’s limit.
- They are usually quite accurate in terms of where the market sells – they are usually close to or on the stop loss so it really does help to limit risk on trades placed.
- A stop can be ‘trailed’ to follow a long trend while leaving the position with room to breath. Please see our other blog articles on the best way to approach this. This will allow the trader to take advantage of profit already on the table and allow the trade to grow even more by always moving the stop to a sensible distance away from current price.
- It can be a great way to stick to an overall trading plan for your account by executing small trades and strictly applying a stop when they go against you. See our other blog articles on risk management and position size.
Disadvantages
There are some draw backs to setting a stop loss and these, in the writer’s opinion, should be balanced carefully with the advantages listed above. We have listed some disadvantages below:
- The emotion in deciding where to sell is removed. Whilst this can be a good thing, for someone who is learning, trading is very much about discipline and closing positions when they are going against you helps you to build strength and discipline in your trading style. It also forces the trader to ‘focus’ very carefully on what is happening in the market at the time of either closing, or not! For example, is the price making lower lows and lower highs now, or is it consolidating or something else? What is the reason for closing based on the patterns the trader can see on screen? When a stop is set, all of this thinking and learning is removed.
- The stop will not always be placed in the ‘best place’… what I mean by this, is that the markets tend to stretch to a particular point and test that point/extreme and then they rebound in the other direction. At the outset of the trade, the trader will not necessarily know where this is. The trade will close with the stop at the ‘arbitrary’ point set at the outset. This may be based on the previous low, but what if the candles go slighly lower than this on a long position, but the point they reach is still higher than the previous low (so the market is still uptrending)? A stop will cause a trader to get out of a trade prematurely/incorrectly.
How to set a stop loss
We have explained how to set a stop loss with the charting platform ‘Trading View’. Please note by signing up through the link below you will receive a unique discount:
https://www.tradingview.com/?aff_id=117138&source=TraderProBlog
However, please also note that as stated above, the stop can be set on any platform.
In Trading View, when placing an order to buy, you would have clikced on the ‘buy’ button here:
Next, you will see the following screen:
You would need to decide, based on your trade set up at the oustset, where you think you would sell in the event the market goes against you, or in your favour. We can help you learn how to make this decision at other articles posted on our blog:
Trader Pro – Trading strategies for success in the financial markets (trader-pro.co.uk)
Click the box next to ‘stop loss’ and enter the price at which you wish to sell in the Price box. You can, at the same time, set a ‘take profit’ price in the same way.
Once your stop is set, it will show on your trading view chart as a red horizontal line with the loss value attached. This can be moved easily (although this is not encouraged unless you are trailing a stop or following a long trend!).
Does Trader Pro use a stop loss?
The golden question… the answer to this is no, not now. I feel like my trading improved tenfold when I decided to stop using a stop loss, for the reason listed above related to ‘learning’ from what is happening on screen and not allowing the software to close the trade for you at an arbitrary amount. The person responsible for Trader Pro has got a lot of discipline, however, and this can be something which is genetic and which a person can posess even from a young age. Trading without a stop loss, where the trader has got little to no discipline is not enouraged and could be dangerous.
We hope you enjoyed this article. You may find it helpful to use it in conjunction with our other blog posts on risk management for an overall trading strategy.
For more great tips and advice on trading the stock market, please visit:https://trader-pro.co.uk/To watch me trade live please visit my patreon page here:https://www.patreon.com/Traderpro8320Finally, if you would like to receive a discount on the Trading View
charting software I use, please click on the relevant link here:https://www.tradingview.com/?aff_id=117138Please note any subscriptions taken via my affiliate link with Trading View may result in me earning a small commission. However, I provide complete transparency on me using Trading View personally – I publish my success on the financial markets via my broker reports and any profits earned were done so by using my own Trading View subscription, so I genuinely do recommend them and have been using the Trading View charts for many years.