What is a stop loss and why we’d like one?
Stop Loss is undoubtedly an automatic order that closes our trade once price reaches a particular level. Usually when opening a purchase order we have a collection of entering our stop loss level.
There are 2 types, after we place a sell order then we want to place a stop loss with a certain distance above our entry price. If we place a buy order we end up needing to place a stop loss in a certain distance below our entry price. For Example for this example on EURUSD the retail price is at 1.22432 and that we want to sell so, as we want a 20 pip stop loss. We install it at 1.22632.
Using a stop reduction in this way is a means of only risking handful of typically between 1% – 5% individuals total trading capital per trade. And hence also limiting the losses on our account which puts our minds while resting when trading. The most important section of trading is psychology or put one other way its about how precisely you answer that price if this triggers your signal. Or put a different way it will affect the method that you perform being a trader.
When I trade I usually risk about 20 pips per trade. This means if I’m trading at £1 per pip then my risk is £20 and means I would need to have a total bank of £400 if I would have been to feel comfortable taking that trade. I wouldn’t feel safe if I was risking any longer than might if I don’t feel safe then it can affect my trading actions. For example I might hesitate and have in late, or if I see profit but I’m scared I might take profit but this may suffocate an excellent trade. So, when we realise finding a stop loss in a level were confident with is very important to your psychology which overall will affect your trading decisions that can affect your speed and agility. Just like any sport fot it matter.
I’ve often heard it being declared that “an accurate professional trader doesn’t care if he wins or losses”. Well this does work because he knows his approach to trading will very probably pull in profit in the long run. What is important is the place where many trades we win in comparison to how many we lose and were only gonna know this with time. So this is why whether shipped to you or loss if you’re an true professional it just doesn’t matter one particular day. Its when were losing over several months that lets us know we aren’t achieving a lot and must re evaluate things.
BUT don’t make use of stop loss techniques alone for making your system profitable!
Its an interest of much debate I’m sure on exactly how we use a stop and I’m sure there is much more books and websites in existence giving much scope within this topic but in terms of I see an authentic long term profitable trading plan although I would say wants a stop loss and is vital. It shouldn’t make use of a stop loss way to be profitable as I’m sure it will not work lasting as usually these forms of system turn out wiping out your complete capital when things get it wrong.
A good software system must have the direction right almost all of the time otherwise its depending upon the stop method which for my part is not the path to extended profitable trading. Lets take Roulette for example. Now, I’m a fan of online roulette but I can advise you from experience there isn’t any system that may beat roulette regardless of you do. There are I’ve heard over 7000 roulette systems around. Of them there’ll be variations of those that depend on a betting method called Martingale. Let me briefly explain:
Martingale basically aims to recoup a loss of profits by doubling the subsequent bet. The allure is strong and quite rightly as therefore it appears you cannot lose but ok you can. You see eventually an extended losing streak will get rid of the risk capital in the player. If you go through the roulette player from short-term then it can appear they are successful but if you peer at their playing over nearly a year they are certainly going to have lost their risk capital sooner or later.
Bet £1 on Red it Loses Balance = £99
Bet £2 on Red it Wins Balance = £101
Bet £1 on Red it Wins Balance = £102
Bet £1 on Red it Loses Balance = £101
Bet £2 on Red it Loses Balance = £99
Bet £4 on Red it Loses Balance = £95
Bet £8 on Red it Loses Balance = £87
Bet £16 on Red it Loses Balance = £71
Bet £32 on Red it Loses Balance = £39
Bet £64 on Red it Loses Balance = £39
Can’t place much more bets and there is no way you are able to get back up to £103 so you have forfeit
This is surely an example of counting on a flawed management strategy to win and not relying upon a solid system. Because quite simply you can not get information or something to give you a benefit on a number. If we do flat betting on Roulette then a casino edge will slowly diminish our balance also. Quite simply can only count on luck to produce profit here.
If we grab the stock market eventhough it has factors of predictability, it isn’t really fixed odds betting, the likelihood of price transferring or from your favour changes at all times. Yes it can be hard but an excellent system will get it right otherwise there would be no extended profitable traders which I can assure you you will discover.
Some with the most renowned stop loss methods I know of:
This is the place the stop level moves with the price with a predefined level as set through the trader. For example for this example the pricing is 1.22432 and that we want to sell and we all place our take a look at 1.22632. Now if price moves lower to just one.22332 then our stop will even trail behind and move to at least one.22532 with no input from your trader. Now if the purchase price moves against us the stop will stay at 1.22532 which ultimately will protect us from the bigger loss as we left it at 1.22632.
Although this process does have its rewards and disadvantages.
Pro’s = It minimizes losses
Con’s = It doesn’t give your trade to breathe and thus diminishes some possible good moves.
But everything depends on the sort of system you employ. I think it is not bad for if the body predicts breakouts.
When price moves in profit by a percentage as set with the trader the stop loss is moved in the stop loss level for the entry price there bye protecting the trader from any losses.
For example shall we say the prices are 1.22432 and that we want to sell and we all place our take a look at 1.22632. If we think we have to move pause and break even though we are in profit by 20 pips. When price reaches 1.22232 then a stop is moved from 1.22632 to a single.22432 our basic.
I find such type of stop loss method best for swing trading or when your body plans on holding the trade on the day for a superb trend.
Although this technique does have its advantages and disadvantages.
Pro’s = It lets you hold onto your trade as long as you think price will come in your favour.
Con’s = As markets do fluctuate often it can keep you out and thus miss out on any profits.
It all depends upon how industry behaves and yes it think using this method relies on further judgement on the markets behaviour.
50% Lock In
This method involves firstly allowing the trade to breathe and for that reason is suited to holding the trade spanning a day or 2 and locking by two of what’s there. Its good given it allows our trade to breathe and is particularly in line with the golden rule of keeping winners.
I would normally trade this as so:
I would enter a buy order at 8am the EURUSD at 1.22432 having a 20 pip stop loss at 1.22232. I go back at 12pm to view price is now at 1.23032 this means im in profit by 60 pips. So I would move my halt to a 50% level at 1.22732, so now I know ive profited regardless of but still employ a possibility of increasing profit if price ended up being to move higher.
This is the place we place another order with a stop loss level. This is surely an effective way of counteracting when you find the trade wrong. It works thus, you’d enter a buy order around the EURUSD at 1.22432 which has a 20 pip stop loss at 1.22232 but you’d probably also place another version of the sell order only at that stop loss a higher level 1.22232.
My personal favourite is holding over days while stopping the main peaks
With my system you could possibly only be risking 20 pips but every 3-4 trades place will dsicover profits that could reach over 100 pips because using my favourite will be the 50% lock in using a slight difference. Instead of locking inside 50% level I instead consider the previous major price peaks make my take a look at these levels. Price peaks provide a better thought of true market direction just what exactly better way to hold that direction than using price peaks, as although price fluctuates, if it is for example shorting then price shouldn’t exceed the previous peaks until we have a major direction change.
What is profit factor ratio as well as your ideal risk to reward ratio?
Ive seen several trading systems and in addition they all look good on paper however, there is one thing they never show and it is down to you to discover your self. Its the Profit Factor Ratio or PFR. This is the place where you find exactely you profits for a losses. If over many trades its still above 1 then the body is profitable. This one major point is exactly what all trading systems don’t actually teach you, but ‘s what you have to be a genuine
There was 1 system I remember especially which I guess saddled with me and is also what led me for the goal of holding a trade more than a few days for optimum profits while risking simply a small amount. Obviously I can’t give names here though the main promise was most trades make 100+ pips profit by lunchtime. Now like several systems you find out about they always demonstrate the good while glossing on the bad. What they don’t show you will be the reality of how that system performs. You could only see the reality once you have bought it and experienced trading it yourself.
So we’ve got to backtest and locate the systems true PFR.
From experience my trades usually find yourself with a risk reward of just one to 4 meaning for each £1 invested I expect a £4 return for if it trade wins. This statement is irrelevant what really matters could be the profit factor ratio. Or simply your profits / losses. If its above 1 your in profit. It is determined by how high above 1 concerning how fast you can profit and just how much we profit could make. So when trading I always inspect my method is working and being confident that the PFR is > 1.
For example let’s imagine I placed 1000 trades which has a strike rate of just one in 4, and every winning trade to produce £20 while a losing trade makes £5. We can expect 250 winners and 750 losers. Sounds bad to start with, 750 losers Oh No! but watch:
250 winners at £20 a victory = £5000
750 losers at £5 a loss of profits = £3750
Profit / Loss = PFR
5000 / 3750 = 1.33
Our PFR is 1.33 that is certainly I would say a practical PFR. Trading at £1 a pip means we shall profit £1250 over 1000 trades placed. £1250 profit from your £100 investment is serious income generating potential. Of course it is a conservative PFR you can find many systems around with higher PFR. I’ve read that many systems realistically reach slightly below 2.0. Mine is 1.33 I can experience that.