In today's article, you will learn what a stop loss is and how to best use it no matter which market or broker you choose.
Profitable Binary Options Strategies
What is a stop loss and why is it important
A stop loss is an order type that automatically takes you out of a trade. This means you don't have to look at your charts all day and get stressed when the price gets close to your stop loss.
Of course, taking losses is unpleasant, even if it is just a losing trade for a small amount. But how would you feel when your stop loss was hit but the price moved even more against you?
You feel relieved, don't you? Not only have you freed up space in your portfolio to look for the best trading opportunities, but you have also averted a huge potential loss. This is why you can think of a stop loss order as a "risk police" to keep you from losing more money or taking unexpected losses.
How to set a stop loss no matter which trading platform you choose?
It is also important to know the different types of market orders:
- buy stop
- Buy Limit
- Sell Stop
- Sell Limit
Let's analyze them in more detail:
- Buy Stop is an order to open a long position when the market exceeds a certain price level.
- Buy Limit - an order to open a long position when the market falls below a certain price level.
- Sell Stop is an order to open a short position when the market exceeds a certain price level.
- Sell Limit - An order to open a short position when the market rises above a certain price level.
Buy Stop and Sell Stop
If you are trading breakouts, you can place a buy stop at the breakout point and then place another sell stop below the price, which acts as your stop.
Buy Limit and Sell Stop
If you are trading pullbacks, you can set a buy limit order on the pullback and then place another sell stop order below the price, which acts as your stop order.
Now let's look at short positions.
Sell Stop and Buy Stop
If you are a breakout trader, you can set your sell stop at the breakout point and then place another buy stop order above the price that acts as your stop order.
Sell Limit and Buy Stop
If you are trading pullbacks, you can set a sell limit order on the pullback and then place another buy stop order above the price that acts as your stop order.
How to know where to set stop loss?
It is very important to know exactly where to set the stop loss.
The last thing you want to do is place it in random places, just like you would throw a dart while blindfolded.
So, here are three different ways to set a stop loss:
- Below or above support and resistance levels.
- Below or above a swing low or high
- Below or above the trend line.
Below or above support and resistance levels
The support area shows where buyers and sellers held the price several times. Setting a stop loss below a support level can be effective when trading markets that are moving in a consolidation.
Avoid support levels tested more than five times as the level gets weaker the more times it is tested.
Below or above a swing low or high
The swing low on your chart represents the "nearest low" on your chart.
Setting a stop loss below the swing low is beneficial, especially in heavily trending markets that create little to no support.
Here is an example of a breakout setup using this technique:
Below or above the trend line
A trendline is when you connect two or more swing lows and it acts as a support area in a trending market.
The best thing about using a trend line is that it also acts as a dynamic level to place your stop loss.
Using this technique is usually effective for trends that tend to hold swing lows for a long time.