How to Use a Stop Loss Order: a Detailed Guide

Traders often discuss whether setting stop losses is necessary. Some of them say that we can trade without them and earn more, some say that they have special stop loss strategies which work.

Today I wanna shed some light on this issue and share my point of view.

In fact, this order isn’t pointless and it was created somehow. And really, there are trading stop loss strategies that give a trader an opportunity to control his risks and profits just without this order.

But… let’s go step-by-step.

What is a stop loss order?

Today I want to speak about some basics for you (if you are a newbie, of course) to be ready for a discussion of more advanced strategies for stop loss that will be highlighted in my next article.

So, it is an order placed for buying or selling a currency pair once it reaches a certain price in order not to lose more money if the price would continue moving in the wrong direction. It’s like a security protection of your funds.

The main advantage of this order is avoiding the need of constant market monitoring. You set an order and keep calm about the funds, as you are sure that your risks are measured. Also, the emotional component is not so strong in a trade with a stop loss. You won’t have a great wish to give a pair "another chance" to move as you wanted it to.

The main disadvantage is that short-time price fluctuations can easily move the quotes to your stop loss level and then they’ll return back. Hence, the size of your SL can be determined by your trading style. Keep it wider if you trade medium- and long-term, and tighten them if you are a day-trader.

Sounds well, doesn’t it? Of course, but keep in mind that even having some strategy for stop loss is not a guarantee of consistent income. You still should make smart decisions while trading. Other way using such orders will help you to slow the blowing of an account.

How does a stop loss order work?

For example, if you forecasted that EUR/USD should grow and started buying it at a certain level, you could set your stop loss in 10 pips below this level to protect yourself from losses in case the pair starts to fall.

Surely, you could monitor the price manually and stop a trade when you decide that it will cost you too much and a reversal is unlikely to appear. But what to do if an order is medium-term? Hardly you would monitor the market day and night.

I want to tell you from my personal experience that it helps greatly sometimes. I was on vacation last summer and had some medium-term positions opened. The price for EURUSD has fallen tremendously, and I was buying it for that moment. It was around 23 June if I remember it right. So, I opened my terminal and saw that my stop loss was hit and the quotes were far from it.

You should wonder what I was doing and why haven’t I noticed the upcoming reduction. The answer is so simple as it can be. It was summer, my family and I went to the seaside and the Internet connection was so weak in the hotel that even mobile MT4 couldn’t work normally. You know what happened when I’ve found a well-working Wi-Fi.

Hello! My name is Mohammad Hafiz. And recently I became a blogger