What is a Stop-Loss?admin
Stop-Loss ; Stopping trading in the market and leaving investment opportunities on time has always been an integral part of trading. In other words, managing and maintaining capital is your most important job as a financial market trader, because maintaining capital will always take precedence over trading profits. In fact, sometimes patience is useless in a trade, so how much better to get out of the market before we lose more. In this article, we try to explain how to get out of the market before losing more with the help of an article from the Heroes trading site. In other words, this article answers the question of where to put your Stop-Loss at the lowest possible risk.
What is a Stop-Loss?
Simply put, a loss limit is a condition you set for an exchange: If the price of an asset reaches X (Stop Point), place an order for sale with a Y price for me to avoid further losses.
Due to the many factors involved when deciding to buy a stock or asset, some important considerations may sometimes be easily overlooked. Setting Stop-Loss trades is one of these factors. If Stop-Loss is used properly and has a rule, it can make a big difference in the efficiency of your trading system and the amount of your profit.
Stop-Loss can generally be defined as a custom in which, when the price reaches a certain level, the asset is sold in order to avoid further losses, or an open position in the market is closed. This tool is used to limit losses or gains in trading, because the loss of trading profits will also be a loss.
Although the main application of the loss limit will be in short or medium term trades, investors can also take advantage of this feature.
In fact, Stop-Loss is an automatic order that the investor determines the amount and by registering it in his trading platform to the brokerage or exchange office, he orders the sale of that asset at a predetermined price.
For a better understanding, consider this example: Suppose Ethereum is priced at $ 1,000 and we predict the price will reach $ 1,100, we set our sales target at $ 1,100. On the other hand, for various reasons, our forecast may be wrong and the price of Ethereum may fall, in which case we should not allow the transaction to lose more than a certain amount. So, for example, in an exchange office, with the help of the Stop Stop-Loss order, we set our trade at $ 900, that is, if the price of ether reaches 900 or less, the exchange automatically sells the ether to avoid further losses.
Remember that Stop-Loss should be recorded according to our market analysis and review, not conjecture.
If you make a profit in a market transaction, you must be able to maintain it. This is where capital and risk management come in handy. But we must accept that the market will always do what it wants and move as it wants. Every day we face a new challenge, and almost everything, from world politics, major economic events to central bank rumors, and many other factors that correlate different types of assets, causes prices to change faster than the blink of an eye.
If your job is trading and you are not a long-term investor, it is enough to stay in a wrong position several times in the hope of returning the market to your target, so that your trading account balance will quickly decline and your trading motivation and life will end.
Having a predetermined level of exit from losing trades not only provides the benefit of reducing potential losses, but also eliminates the anxiety of participating in an unplanned trade.
The main purpose of Stop-Loss is to ensure that the losses will not be too great. To better understand the importance of Stop-Loss, consider the following example:
Imagine a person 1 and 2 with the same amount of initial capital and trading strategy. The only difference between the two is the amount of risk in their transactions. The first person in each transaction accepts 10% and the second person 2.% risk.
Each trade will lead to only one of two results: win or lose. Therefore, each trade will be closed if Stop-Loss (SL) is activated or when the profit limit (TP) is reached. Now imagine that both people are caught in a losing trade. Under these hypothetical conditions, Stop-Loss activates ten consecutive transactions of the two, but the difference is that the balance of the second-person account decreases by 19%, but another capital loses 65% of its value.
Of course, this does not mean setting small losses in your trades, because the reality is that large investors and market makers in all financial markets use the Stop Hunt strategy to provide a temporary trading space with high volatility. ) use. Simply put, this strategy is used to activate the loss limits of other traders in the market to create a temporary trading environment with high volatility.
For example, in the figure below, most traders have set their trading losses on the green support line, so large investors artificially direct the price below this level in order to activate the loss limits of other investors. After this move, market fluctuations increase and it continues its main path without making a profit for the rest of the traders. The basis of this strategy is based on the fact that many traders tend to adjust to certain price levels to adjust the loss limits of their trades, which are particularly attractive to the trades of large investors or oscillators. So do not be afraid to activate your Stop-Loss trades or so-called stop-ups, the important thing is the overall outcome of the trades and optimizing Stop-Loss in your trading path.
How to determine the best loss point?
The ideal location for setting a loss limit is determined by two factors:
- Stop-Loss must be at a level that proves the entry point was completely wrong.
- Stop-Loss must have an acceptable winning rate in trading history. This rate depends on your overall trading strategy.
Determining Stop-Loss has a few simple steps that are very important to adhere to. We review these steps:
Step 1: Define your trading strategy (plan)
If you do not have a clear trading strategy, you must create one before continuing. To optimize the loss setting, you must first have a permanent approach to it. Once you have determined the specific rules for the location of the loss limit, follow up on its operation and see if there is a way to improve it.
Step 2: Test your trading strategy
Measuring the efficiency of a trading strategy allows you to measure the performance of your trading loss system based on historical price data. Review the results to identify the most useful ones. Also test different timeframes and value pairs and choose the most productive one based on your strategy.
Step 3: Improve your trading strategy and try again
If your strategy is not profitable, it’s time to change it. Even if the results of your strategy go well, consider experimenting with new ideas; Perhaps in these studies you have found a more profitable system. Do not be afraid of creativity, sometimes the strangest ideas are the most profitable! Once you have the right strategy, it’s time to move on to the fourth step.
Step 4 : Discovering Your Purpose There are many ways to strengthen your trading strategies
Now it’s time to put the results of your strategy to the test. Create a demo account and monitor the results when you start trading in it. Limitations and drawbacks will gradually become apparent at this stage, so here you can edit your strategy and finalize it.
Common errors in stop-loss setting
Wrong adjustment of stop-loss can cause a heavy loss to the trader or, conversely, cause a loss of profit. To set the right loss limit, keep the following in mind:
Many traders are initially interested in setting small Stop-Losses that are very close to the price. Therefore, Stop-Loss is activated many times and the market removes this group from the game at a loss. This model of Stop-Loss adjustment may be appropriate for some day traders, but in most cases, setting a Stop-Loss with a wider or farther price range will usually lead to more profit.
This method is especially profitable for oscillators or traders who enter into trades at price returns (pullback). This is because you give your trades more room to fluctuate.
Incorrect trading volume
If you have a small amount of capital in the market (for example, below $ 1,000), it is better to trade with a small volume so that you can set more stop-losses.
Many traders suffer losses due to inconsistencies in the size of their trades with their account balance. They choose their Stop-Loss trades according to the first small case and ignore one of the most important elements of the market, the fluctuations. Therefore, matching the size of transactions with the investment account balance, in addition to allocating a reasonable amount of risk, will also allow prices to fluctuate.
Lack of tested Stop-Loss strategy
Although we mentioned this at the beginning of the article, its repetition is not without merit due to its immense importance. If a trader acts only emotionally in setting Stop-Loss, he will have no way of knowing how to improve his results. Because by doing so, there will be no stability.
In any case, having a strategy alone is not enough. The strategy must be constantly tested to prove its effectiveness.
7 Common Professional Methods for Setting Stop-Loss
By studying the following 7 items, you can get new ideas about where to set up your Stop-Loss trades. Naturally, their results will be different in each strategy. But to begin with, it gives the trader a good idea.
The first method; Setting Stop-Loss based on a percentage of capital
Let’s start with the most basic method of setting a loss limit. Stop-Loss in this method is set based on a predetermined percentage of the trading account. For example, a trader is willing to risk two percent of his capital in each trade. This amount can vary from person to person. At-risk individuals may expose up to 10% of their account to potential losses, while risk-averse traders typically risk less than 1% of their trading volume.
After determining this value, the trader calculates the location of the Stop-Loss relative to his entry point according to the size of his position. The disadvantage of this method is that the loss limit should be determined according to the market environment or strategy rules, rather than how much of your capital you are willing to lose.
The calculator embedded in the Trading Crypto Course site will help you determine the volume of positions and adjust the Stop-Loss.
The second method; Adjust Stop-Loss using the latest price and floor price
Price fluctuations shown in the form of ceilings and floors in the chart are a good place to set Stop-Loss. This method is one of the simplest and most basic methods of adjusting Stop-Loss and at the same time one of the most practical ones. Consider the following example; By entering the sell trade (Short) at the specified point, you can place your Stop-Loss trade at the current price ceiling.
Similarly, you can see the Stop-Loss setting in buy transactions in the image below. The point to note is that according to the topic of capital management, the ratio of risk to reward (Risk / Reward) in these two examples and the similar case in the third method is 1/2. Simply put, in exchange for two reward points, we are willing to accept one risk unit after entering into a trade.
A big advantage of setting Stop-Loss based on the latest fluctuations is that you can usually enter the market with a small Stop-Loss. On the contrary, the downside is that these losses will be easily activated, as they are adjusted close to price movements and have a small range.
The third method; Adjust Stop-Loss using the previous price ceiling and floor
If the use of the last ceiling or floor for transactions seems small due to price movements, sometimes the use of the previous ceiling or floor is suggested. Some traders may not like the idea, as Stop-Loss adjusts far beyond price movements and disrupts the profit-loss ratio.
Sometimes in some trades, after doing some research and studies, you may find that using a larger Stop-Loss can actually lead to a higher winning percentage. Of course, this may not be the case with your strategy. However, if you are one of those traders who adjusts their Stop-Losses too small, this simple trick can greatly improve the profitability of your trading strategy. For example, compare the previous method with this method.
The fourth method; Adjust Stop-Loss using moving average
Setting Stop-Loss using moving averages is a good way to follow trending strategies. This indicator dynamically provides resistance and support levels to the trader according to the price movements in the market.
In this method, it is better to first check several time frames and different time periods in the past and present of the market to find the best one that is compatible with your strategy. For example, you can use moving averages with periods of 20, 50, 100 and 200, which are also very popular among traders. You also do not need to test all available ranges. The performance of the moving average is important as the Stop-Loss of your trades. In fact, it can be said that using the moving average as Stop-Loss is a kind of use of Trailing Stop loss.
We said that using the moving average as a stop-loss is a good way to follow trending strategies. But sometimes some traders use this method in their strategies to find the place of rotation and return of the market. Also, one of the disadvantages of this method is the movement of the moving average along with the price. Therefore, the stop-loss must be constantly shifted. In this method, the ATR or Average True Range indicator along with price actions (price action) will help the trader to identify market fluctuations and adjust reasonable stop-loss.
The fifth method; Adjust stop-loss using support and resistance levels
Another way to adjust stop-loss in trades is to use key support and resistance levels. The point is that these levels are not exactly linear, but rather support and resistance areas. So be careful when setting up stop-loss with this method, leave a little room for price fluctuations around them, because often the price will not react only to a linear and static resistance and may be slightly up or down these levels. To fluctuate.
As a rule, the best places to draw levels are the areas to which prices react most strongly. Violation of these areas is also a warning that your initial analysis of the chart is incorrect. An interesting point is not to ignore the psychological levels of prices and circulating numbers, as these levels are often levels of support or resistance.
Sixth method; Stop-loss adjustment using star parabolic indicator
Using the Parabolic SAR indicator is another great way to set a trading margin. The use of this indicator is to show changes in acceleration (momentum) and confirm the uptrend or downtrend of the trend. This indicator, like other indicators, is not complete on its own and complements price movements and other indicators, but it works well in following and confirming the trend.
This indicator responds to both trend-following and trend-turning strategies. You can use similar indicators such as Bollinger Bands.
The seventh method; Stop-loss adjustment based on time
In this method, the stop-loss will not be based on price parameters, but will be adjusted based on time parameters. For example, this method may require the trader to close his position at the end of the day, regardless of the outcome. Of course, this method is not very popular and less people use this method in their transactions.
This method will not take into account the real market situation and also the trader will eventually have to close positions manually.
Try not to get too caught up in the constant improvement of your loss-setting location, as there will be no perfect place to adjust it. One of the principles of trading is to play with these percentages. When you track the output information of your Stop-loss adjustment strategy, the best place and approach to adjusting Stop-loss trades will be revealed.