Stop Loss: Instructions for Use
Dear readers, today's article will shed light on what a stop loss is, how it can be useful and how to avoid mistakes when placing this order. Tighten your seat belt and brace yourself for an exciting journey ahead.
Definition
If this term is so much Greek to you, fear not. We're here to catch you up. The name says everything, doesn't it? This is an order that specifies that an asset be bought or sold when it reaches a specified price. The aim: limit losses when the price reaches a pre-set level. If this explanation is something you want, we invite you to come along with us just a little further.
Why do you need a stop loss?
Remember simple wisdom: "Cut losses and let profits run”. A large number of traders have already seen how important it is to manage loss-making trades in time.
Truth be told, stop loss can be considered as a general rule when it comes to cutting losses for now. What is more, it has gained popularity among many trading strategies. Despite this, there are also those who deny the importance of this tool or do not use it at all.
Such a position might be the case, but most likely it is associated with the ability (or rather inability) to use the tool. With that said, let's talk about the main mistakes when placing this limit order.
Traders don't place a stop loss in advance
Choose the exit levels in advance and place an order. The same goes for determining the entry point and your goals.
If you find fluctuations in profit/loss during trading, you will be trying to cling to an earthworm just to stay in the market (perhaps to your detriment).
"We'll work it out as we see how things go, okay?" type of thing doesn't work here. A real professional must assess whether he can make a mistake, even before opening a position.
Placing an order based on arbitrary data
It is rather sad, but still, a reality, that the market doesn't care about your risk/return ratio.
One of the biggest mistakes that traders make is trying to fit the market to their strategy. Wrong, so wrong. You need to do exactly the opposite: form a strategy, focusing on the market.
When choosing a course of action, pay attention to the TA. A stop-loss cannot be based on a price level that gives you a certain percentage or the desired R:R ratio. This is a typical example of a non-professional consideration that should be kept outside the trading process.
Stop-loss in the liquidity zone
The market is like a living organism: it moves and changes. Something stops working, breaks down, and vice versa. There are certain price structures aiming for the level of liquidity before the market changes.
Stay away from the swing high/swing low and clean equal highs/lows. There is a high chance that the market will pass through these indicators and then change the direction.
The next thing you know, players with stops above or below these points are leaving the market. The latter will continue its journey in the direction you expected, but without you.
Do not place the order in obvious places. Pay attention to the sharp swings in price on the chart - they serve as a signal for those who place a stop loss in pursuit of liquidity.
Bottom Line
Now you know what a stop loss is, and most importantly, what mistakes to avoid when working with it. To stay up to date with the latest news from the world of trading, follow us on: Twitter, Facebook, or Telegram.