Stop order, managing the risk of being wrong



Having a stop order is an important yet simple way to make sure you do not over expose yourself to the market. We will never go into a trade thinking it will go against you but there will always be a time when it does. So our advice will always be "remember to place your stop loss orders" They will get you out of so much trouble, protect your capital and give you peace of mind. So it's worth saying again "place those stop orders at the time of placing your trades". There are three types of stop order that you might think about.

1. The normal stop
2. The guaranteed stop
3. The trailing stop

All three have them plus point and depending how you look at things will depend on which one will be right for you. Let's take a look at what the differences are.

The normal stop

When you place your trade your stop will be a point on the chart where you do not want to go beyond to lose any more money. If the market starts to move against you and this point is hit your trade, with you losses, will be stopped and the trade will be closed. This means you have more control of your loss instead of just blindly leaving the trade and your account open to a greater hit, sounds sensible right. You will be amassed at the amount of traders who think they can do without stops. They don’t tend to spend that long trading as their account gets burnt very quickly.

The guaranteed stop

The difference from the normal is small and will cost you a little too. Normally in the form of a little extra on the spread, a few more points on either side of the bid/offer price but some might say it's worth it. The normal way a trade is stopped out is seen in the example above. The market starts to move against you, your stop loss order is hit at the exact level you have stated and your trade is closed. The market though does not have to work like this. There is nothing to say that it has to move up or down in an orderly faction. If for example there is some unexpected news the market might "gap" in either direction especially after the weekend when the market has been closed. It tends not to happen as much to the forex as it does with the stock market but there is still a chance that you can be caught out by this. The way to protect yourself from this would be to use a guaranteed stop which would close your trade at the point you have chosen even if the market gaps pass this.

The trailing stop

This does exactly what it says. You set where you would like the stop order to be and if the market moves against you it will stop you out at that point. If on the other hand the market moves in you favour and your trade goes into a profit then the trailing stop moves with it locking in some of your profit. This is a good way to lock in and protect some of your profits. Don't be fooled into thinking that the market might somehow know where your order is placed and move to stop you out of trade, so therefore don't set you stop orders. It just does not work like that. Instead remember not to place your orders to tight as you must give the market room to manoeuvre so that you don't get caught out in the general noise of the day. It might take you a while to judge how far to set your order on any given currency pair or time frame but it will come with experience and why we promote the use of a trading journal to help with things like this.




Return from stop order back to Money Management







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