Trading guide on Stop Loss for beginners with explanations, examples, and screenshots.
A lot of Forex beginners encounter the term stop loss, but few understand what it means. In this article, we will take a look at the essence and details of what stop loss is. We will also learn how to install stop loss to increase trade efficiency.
Stop loss is a pending order to close a position, which is activated if the losses in the transaction reach a certain point. To put it simply, stop loss provides protection against large losses in trading.
So, how does it work?
I1 An example of stop loss in a buy deal on EUR/USD.
You can set a stop loss in the MT4 trading platform in just a few seconds. There are two ways to set a stop loss order:
The classic way to set a stop loss is:
I4 Setting a stop loss through the New Order window
Similarly, you can set a stop loss for a transaction that’s already open. Just right-click on a line with an open transaction and select «Modify or Delete Order», and the same window will open. In this window, you can set up a stop loss or make changes to previous ones.
The quick way to set a stop loss is:
The downside of setting a stop loss the quick way is that it is not always possible to set it to a precise limit. However, you can save a few seconds, which is very important for scalp trading.
There are two types of stop losses in most modern trading terminals: standard and self-modifying. Let’s consider each category in more detail.
Standard stop loss is the stop limit set by a trader, which remains unchanged. Stop loss will close if the price reaches its level, or the trader can personally change or remove it if they want.
Standard stop losses are divided into two subtypes:
For a trader, guaranteed stop loss is more profitable, but not every broker offers such terms of trade. Also, a broker can increase the spreads or assign an additional commission.
A self-modifying stop loss, or trailing stop, is a stop order that follows the price, protecting the profit. If the trader’s predictions are correct, the trailing stop moves after the price at a specified distance. If the price turns against the trader’s position, the trailing stop acts as a normal stop loss up to the closing of the transaction.
I2 Setting a trailing stop
Trailing stops are set slightly differently than a standard stop loss. After the opening of the transaction, you need to click on its order line with the right mouse button and select «Trailing Stop». Then you can set a stop indent from the price.
There are several basic working methods for setting a stop loss. The conditions for placing stops are specified separately in most trading systems.
Scheduling is the most common way to work with stop loss when the trading system does not stipulate any specific rules of operation. When a trader sets a stop on a schedule, attention is paid to the following factors:
I3 Stop loss on the support level
Always remember that when opening a buy transaction, the stop loss is set slightly below the support level or local minimum, and when selling it, it is set just above the resistance level or local maximum.
Interest stop loss is usually tied to a constant value, for example, the capital of a trader. There is a classic rule that losses in one transaction should not exceed 2% of overall capital.
The percentage of a stop loss can be calculated as follows:
Stop loss by time is an exit from the transaction at a certain point, regardless of the results of the trade. Such an exit is not exactly a stop loss, as the trader closes the deal manually, but many experts attribute it to the category of stops. A good example of stop loss by time is closing deals at the end of the day for intraday trading. This style of trading does not allow trades to be left open for the next day, so, regardless of the result, the trader should close them at the end of the day.
There are different types of stop losses and different tactics for their use. However, one tenet holds true for all Forex strategies: trading without a stop loss is a mistake. Stop losses must be set, especially for beginner traders, as it will ensure your capital is protected and make the trade more meaningful and systemic.