Published: November 6th, 2020 by Andrew
What is the biggest problem for a trader? Limit your losses, bring them as close to zero as possible. If people normally believe that traders care more about how to make money, they are wrong. Here, we will analyze one of the most important tool in Trading: Stop Loss.
A fundamental aspect for every professional is to first think about techniques and strategies that limit capital outflows that do not generate profits. Those who focus on profits right away, perhaps are not taking into account the risk of loss present in trading.
Well you should know that trading professionals rather than being frightened by the loss of part of their capital, prefer to face the situation and find the most appropriate solutions. Part of the solution to the problem of trading losses are so-called Stop Losses.
Want to learn more about Stop Loss and how it helps you avoid losing money when trading? So, download this ForexTB guide now, here you will find not only the indications to use the Stop Loss properly, but also practical and general advice on how to manage your investment capital.
What is Stop Loss and how it works
How do you trade professionally? There are not many rules and good practices to follow to trade professionally, however you must know that trading professionally is the only way that can lead a trader to profit.
There is no other way to make serious money with online trading than by living this activity following all its fees. These basic principles and rules of conduct include all the capital management and loss limitation techniques of which Stop Loss is an integral part. It is a limit that can be set on all the best trading platforms.
To be exact, we can speak of Stop Loss as an order that you can set. This type of order is not unlike all other types of orders that you can give to a good investment platform, but it is the most important order for those who intend to make a living from trading.
Here is a definition that can be given of Stop Loss:
Setting a Stop Loss is the means to establish the maximum loss that you are willing to make in an online trading operation.
Why use Stop Loss? All the advantages
Especially beginner traders face the problem of losses every day and experience it as a sword of Damocles that continually hangs over their heads. As always, just get informed and understand how to use the tools available to change your perspectives.
The first advantage of Stop Loss, in fact, is that it solves the problem of excessive losses (not losses in general). If you want to trade professionally you must know that losses are part of the trade and you CANNOT avoid all losses.
For this reason, traders have changed their attitude and have thought that if losses cannot be avoided, it is still possible to limit them to the maximum: this is how the concept of Stop Loss was born.
Limiting your losses means protecting yourself and your investment capital. It also means ensuring durability on the market and maintaining the sustainability of your business over the long term. But there is also an additional psychological advantage.
The Emotional advantage
There is one aspect of trading that too many tend to devalue and it is the emotional aspect. Too many traders, even among the top professionals overlook the fact that trading is 30% technical and 70% emotionality. This is an undeniable truth, an aspect that true traders know about.
In particular, there is an emotion that dominates the minds of traders and it is fear. Fear of making bad decisions and fear of losing your investment capital. These fears are completely normal and understandable, but they risk influencing the life of those who trade online too negatively (Expert Advisors are also used to avoid them).
Fear generates losses, this too is a full-blown fact. So what’s another advantage of Stop Loss? This Stop order places a limit on losses, but at the same time is able to put a limit also on the fears that are felt during the negotiation phase.
Thanks to Stop Losses, a trader can be 100% certain that he will not lose more than a certain amount that he has determined he was willing to lose. This guarantees greater sensations of security and stability in operations, reducing fear and leading the operator to obtain greater results in the negotiation phase.
How to use Stop Losses?
Now that you understand the concept of Stop Loss, let’s start to establish from a practical point of view how they are used and how they are fixed on the main online trading platforms in circulation.
When a trader thinks about limiting losses, there is a number that immediately peeks out among his ideas and it is zero. However, for how the markets work and the trades on them you must know that it is impossible to think of setting the Stop Loss at zero loss, you must always accept a risk margin.
Let’s make a practical example
Let’s say you open a buy position on oil at $ 40. To ensure that the Stop Loss prevents any type of loss and is therefore set to zero, you have to tell the platform that the order must be set exactly at $ 40.
In this way, the platform is told that if the price reaches that level, the Stop Loss activates and no losses occur for the trader. However, such a choice is limiting, unproductive and wrong.
By setting the stop loss on the same market entry quota, of course, the possible loss is zero, but also the possible profits in the vast majority of cases could be zero, because it would continually cause a premature closure of the trade.
If you bought oil at 40 it is possible that the price will rise immediately, but also that it will retrace to 40 dollars before continuing its upward path again. At that point your position would close without generating profits or losses.
Read also: Trailing Stop
Advice on how to set up Stop Loss
To give oneself the real possibility of earning, however, it is necessary to give what we can call “vital space” to one’s operations. This means that the Stop Loss must be entered lower than the market entry rate. We explain how to do it.
Every trader must be willing to lose no more than 3 – 5% on a market position. This means that if you have a capital of 1000 euros you have to risk a maximum of 30 to 50 € in a trading operation.
The Stop Loss, therefore, must be set to a maximum of 5% of your total capital, this means that the maximum price change at a loss that you can accept must be 5% negative compared to the type of position you have opened.
We understand that the concept is complicated but let’s make an example so that you can understand how to set a perfect Stop Loss:
- You open a buy position at $ 40 on oil, it means that you expect the price to go up.
- The Stop Loss in this case must be set on a maximum negative change in the price of 5%, or 2 dollars downwards, which means at 38 dollars.
In case things go wrong and therefore the price of oil does not go up making you gain, but goes down making you lose, a stop loss at 38 dollars would guarantee you an automatic exit from the market on that market share and with a maximum loss of 50 € your capital was 1000 €.
As you can see, in the end it is a simple concept, just apply it properly to protect your capital and ensure safe navigation in the financial markets.
Read also: Moving Average
Best Brokers for Stop Orders
But where is it possible to trade using excellent Stop orders that punctually click precisely where you set them? There are really many intermediaries online, but there are few who have quality platforms to rely on seriously.
Above all, many brokers don’t care about protecting their users’ interests. Even if authorized and legally enforced, there are intermediaries who do not understand the need to protect their clients and their trading capital.
For example, not all brokers allow traders to avoid the so-called “negative balance”. That is, upon reaching the end of the funds available on an account, these brokers do not allow the automatic closure of all open market positions, but allow the traders’ accounts to end in negative.
What are the best online trading brokers that protect traders from negative balance and allow you to set Stop Loss easily and at will? Here are the best ones (we chose the free and easy to use ones):
Min. Deposit: 50€
Min. Deposit: 250€
Min. Deposit: 10€
Min. Deposit: 250€
Min. Deposit: 100€
Min. Deposit: 250€
Protection and Stop Loss with ForexTB
On the ForexTB broker platform it is really easy to set up Stop Losses and other types of orders aimed at protecting your investment capital. In fact, there are also Take Profit orders which are useful for guaranteeing the expected entry when it is made.
In addition to providing tools of this type on the platform, ForexTB takes care of the success of its clients’ operations in other ways as well. In fact, it offers a trading course specifically dedicated to those who do not know how to set Stop Loss and other market orders.
It is a useful and easy to understand educational resource that you can get for free, just go to the broker’s website.Get your free trading course now, go to ForexTB.
We recommend the ForexTB course because this is one of the best brokers out there and is very serious and regulated. Among the services made available to traders there is also a convenient notification center to find out the best time to enter the market on various assets.
Protection and Stop Loss with eToro
Another broker that can be taken into consideration thanks to the quality of its Stop Losses is certainly eToro. We are talking about one of the best intermediaries around and this is due to the fact that its platform is secure, user-friendly and well organized.
eToro’s WebTrader has many ways to ensure traders can protect themselves from losses and protect their investment capital. Stop Losses are clear and simple to set. Whenever you choose to set one, a special menu opens where by clicking on the + or – sign you can choose the market share that suits your needs.
Do you want to try eToro's Stop orders? Do it now, click here.
If you want, you can practice setting Stop Losses on eToro by opening an unlimited and free demo account on its platform. On the demo you can do realistic trading simulations to understand how Stop Losses positively impact your operations in the trading field.
Click here to open a free demo account with eToro.
What other way does eToro offer to protect against losses? For less experienced traders there is also the possibility of automatic trading on WebTrader. This service consists in automatically copying the operations of other traders on the eToro platform: the so-called Popular Investors.
In the image above you can take a look of what the control panel for opening eToro operations is. Here you can see that the trader was setting up a trade on gold while it was at $ 1228.98 per ounce.
The operation has not yet started because to do so you need to click on the Open Trade button.
Where you see the word Stop Loss at $ 250, you can change the maximum loss amount up to the amount desired by the user. Then you can choose the numbers you want to set up to after the comma.
Read also: Panic Selling
Beware of volatility
Stop Losses are not always 100% guaranteed. When a market is extremely volatile some brokers do not guarantee the trader that the Stop Loss is precisely respected.
For this reason, the advice of the experts is not to act on markets with too high volatility rates. Gold is the classic example of a low volatility market where Stop Losses work perfectly.
To trade and do it successfully, there is no other solution than to take care of your finances in the best possible way. Stop orders are invaluable to any trader in order to secure a long and prosperous career in the field of online trading or any other financial trading.
Many beginners completely ignore this opportunity. This is why it is important to take a good forex course before starting to trade in the markets.
It is a trading tool that serves to limit losses to a pre-set level, beyond which it will be impossible to go down.
Mainly because it allows to limit losses. Moreover, because its use allows to carry out functional Money Management strategies.
During the order execution phase, all the best platforms insert the opportunity to set the Stop Loss level.
Simply by entering the price level beyond which we are not willing to go in the event of a loss.