Stop Loss

One of the most commonly asked questions is: how to place stop loss orders? It is one of the most important things we can do when trading because placing stop loss orders will help protect our money. Each position that we take, we need to place a stop loss in order to exit the trade if something goes differently than what we expected. This placement of the stop loss is critical in developing our overall successful trading methodology. If we do not have an appropriate stop loss, we open ourselves up to the possibility of catastrophic losses. Because of this, we need to make sure that any time we enter a trade, we do so with a stop loss.

Placing a stop loss in not difficult to do. In fact, most brokerages have made it part of their trading platform so it is easy to find. When you actually place it on the trade, it is usually just a matter of a few clicks and you have it placed. Even with the simplicity of placing a stop loss, there are some difficult things that traders have to deal with.

First, we need to know where the most appropriate place is to put our stop loss. Second, we need to have the discipline to actually place it. Let’s discuss each one of these issues.

1. Where to Place Our Stop Loss

This can be one of the more tricky things to learn when trading. If we put the stop loss too close, then we are increasing the probability of getting stopped out. If we put the stop loss too far away, we lose the opportunity to trade the appropriate position size. So, how do we find that “sweet” spot for placing our stop loss? Well, the truth is, there is no perfect way to know where the exact placement should be. There are, however, certain things we can look for to help us know better. The first thing we can do is to identify the support and resistance areas. Then we can make sure our stops are outside of these. In other words, we want to make sure that if we get stopped out, it is after the price has broken the areas of support and resistance. This is a common mistake that traders will make because they feel that having a tight stop loss is the best. The problem with that is that we really should be looking to place our stop at the most appropriate place, not the tightest place. The other tool we can use is the ATR to help us know if our stops are too close or not.

2. Discipline

Even if we know where we should place our stop loss, it can be difficult to place it because we are not “programmed” to do it; we need to be programmed to remember that placing a stop loss is key in our overall success. It is a bit unnatural to do something that is going to force us to take a loss, but if we understand that these losses are part of the overall plan, we can become better and it can become easier for us to place them.

Regardless of how, or what, you trade, stop losses are critical in your overall plan. Take some time to review how, where, and why you are placing your stops so you can become a more complete trader.