Home Stock Market What is stop loss and how to use it

What is stop loss and how to use it

by Thomas
stop loss trading

This is a very important technical part, in this article I will talk about what stop loss is and how to use it on the financial markets.

Stop loss is used by the trader to limit losses of an open position, whether long or short, this happens when the investor specifies his broker to close at a precise level.

One example, I buy Apple at 359 dollars and put stop loss at 357.77 dollars, before I forget you don’t make the mistake of putting stop order at 357 because the round numbers attract the “crowd” of traders, thus increasing the chances that the stop will not be touched.

Stop loss should be used by experts but especially by beginners, because I remind you that the goal is to limit losses, greed and fear play bad jokes so if you do not protect your money it is like riding a motorcycle without a helmet.

Before deciding where stop loss is located, the trader will have to do some technical analysis, for example, see if there are geometric figures (triangles, rectangles), head and shoulders, resistances/supports and I add channels to understand where the price moves.

It may seem simple to do all this, but in reality it is not, because you have to be as pragmatic as possible and avoid personal interpretations, using stop loss is essential to eliminate large losses that would affect money management.

There are several types of stop losses:

  • Limit order is an order to buy or sell an action at a specific price, it is interesting to ensure the execution of desired price (avoiding slippage) even if there is a risk that it will not run


  • Stop limit order (it is similar to the limit order) guarantees the price desired by the trader even if there is a risk that it will not be executed, it is very useful to guarantee profits and cut losses


  • Trailing stop order is when you put a percentage or a figure away from the market price, this choice serves to maintain an open position in the market, knowing that we can have profit as long as the price goes in our direction


  • Stop order is valid when a stock moves beyond a specific point, if this point is touched the order goes to market and trader is filled


  • Market order if touched is a conditional order because it will be activated when a financial instrument will touch a precise price


  • Mental stop is when the trader manages rules in his head, it is not recommended because if the market suffers strong hikes/downturns, you could lose a lot of money


  • Stop loss on volatility will position the order according to the perception of volatility at that time and the goal and to limit the damage in case of strong short movements

Stop loss’s use is essential in the short, medium, long-term operation, although you will take a lot of stops it is normal then with the experience you will manage the trade differently.

I recommend not putting a stop order too close because it might be hit by a price swing, I recommend using Average True Range (indicator based on measuring volatility with a moving average) or by analyzing channel price.

I conclude with a small operating scheme, maybe it will be useful: before entering the market I have to analyze chart, studying an entry price, after I select stop zone and finally I use the stop best suited to my operation.

Always follow exit rules, always remember that the goal is to control the risk and reduce losses.


related posts

Leave a Comment