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What Is A Stop Loss And Why We Need One?

A stop loss is an automatic order that exits the trade when the price reaches a certain level. Usually when opening an order, you have the option to enter a stop loss level.

By Bhagirath RoyPublished 4 months ago 9 min read
What Is A Stop Loss And Why We Need One?
Photo by Clay Banks on Unsplash

There are two types. When placing a sell order, you should set your stop loss at a certain distance above the entry price. When placing a buy order, you should place your stop loss at a certain distance below the entry price. For example, you want to sell when the EUR USD price is 1.22432, and you need a stop loss of 20 pips. Place it at 1.22632.

Using a stop loss in this way is a way to risk only a small amount, typically between 1% and 5% of his total trading capital per trade. Therefore, you can also limit the loss of your account. This gives you peace of mind when trading. The most important part of trading is the psychology, how you react to the price when you trigger a signal. In other words, it affects your performance as a trader.

When you trade, you typically risk about 20 pips per trade. So if you're trading at £1 per pip, your risk is £20, and you'll need a bank totaling £400 to get comfortable with this trade. I would be reluctant to take any more risks and if I was unsure it would affect my trading behavior

For example, you may be hesitant and be late, or if you are scared even if you make a profit, you may make a profit, but that may prevent you from making a perfect trade. Taking losses is very important to psychology, as we know that it influences the whole trading decision and influences the performance. It's the same as any other sport in that respect.

We often hear that a true professional trader doesn't care if he wins or loses. Because we know his trading method is very likely to be profitable in the long run. What matters is the number of trades won and the number of trades lost. So if you're a true pro, it doesn't matter if you win or lose that day. After months of losing, you know things aren't going your way, and you need to reassess things.

However, do not rely solely on the Stop Loss technique to monetize the system.

This is a topic of much discussion. I see how exactly you're using stops, and I'm sure there are other books and websites that provide a lot of space on this topic, but as far as I can see it's really a long term It's a profitable trading system for the most part, you need a stop loss, and it's very important. This type of system usually wipes out all your capital if something goes wrong, so I'm pretty sure it won't work in the long run, so you shouldn't rely on stop loss techniques to make a profit.

A good trading system should be on the right track most of the time. Otherwise, it depends on how you stop. I don't think this is the way to make profitable trades in the long term. Let's look at roulette as an example. I'm online he's a fan of roulette and I can tell you from experience that no system beats roulette no matter what you do. I heard there are over 7000 roulette systems. There is a variation that depends on the betting method called martingale

Let me explain it simply:

Martingale basically aims to recoup your losses by doubling your next bet. It seems that the pull is strong and naturally unbeatable, but it is. Ultimately, a long losing streak proves to wipe out a player's venture his capital. If you look at a roulette player in the short term, it looks like he's doing well, but if you look at his play over many months, it's very likely that you've lost all your risk capital at some point. .


Balance €100

Bet €1 on red, lose credits = €99

Bet €2 on red, gain credits = €101

Bet €1 on red, lose credits Win = €102

£1 bet red lose balance = £101

£2 bet red lose balance = £99

£4 bet red lose balance = £95

£8 bet on red and lose balance = £87

£16 bet on red and lose balance = £71 £103 lost because there is no way to get it back

This is flawed money management rely on strategy to win, don't rely on solid systems. Because you can't get information or anything that gives you an edge over numbers. Casino Edge also slowly depletes your bankroll when you flat bet on roulette. Here you can rely on luck to make a profit.

Take the stock market for example, there is an element of predictability, but rather than a fixed (odds) bet, the odds are constantly changing in which the price will move in your favor or in your favor. Yes, it can be difficult, but a good system can get it right.

Some of the most popular stop loss methods I know of:

trailing stop

Here, the stop level moves with the price at a predefined level set by the trader. For example, if you want to sell at price 1.22432, set your stop at 1.22632. If the price moves to 1

At 22332, the stop is also late and moves to 1.22532 without any trader input. Here, if the price moves in the opposite direction, the stop he remains at 1.22532, leaving it at 1.22632 effectively protects against larger losses.

However, this method has advantages and disadvantages.

Pros = Minimal loss.

Cons = Doesn't breathe life into trades and reduces potential good moves.

But it all depends on what kind of system you have.

Breakeven point

If the price makes a profit by a certain amount set by the trader, the stop loss will enter from the stop loss level. It is shifted to the price and protects the trader from losses.

For example, if you want to sell at a price of 1.22432, set your stop at 1.22632. If you think you should move from stop to breakeven even if you have 20 pips profit. When the price reaches 1

For 22232 the stop moves from 1.22632 to the entry level 1.22432.

I think this type of stop loss method is suitable for swing trades or when the system is planning to hold a trade for a day because of a good trend.

However, this method has advantages and disadvantages.

Pro = You can keep the trade as long as you think the price will move in your favor.

Cons = When the market fluctuates, you may slow down and miss out on profits.

Everything depends on market trends, and we believe this methodology is based on further assessment of market trends.

50% lock-in

This method requires a breather in the trade first, so a day, or he holds the trade for two days and is good for locking half of what's there. This is good because it aligns with our golden rule of giving life to our trades and sticking to the winners.

Normally, I trade as follows:

Place a buy order at 8am. For example, EUR USD at 1.22432 and 20 pips stop loss at 1.22232. I came back at 12:00 and saw that the price is now 1.23032. This means you have a profit of 60 pips.

So if we move the stop to the 50% level at 1.22732, we can see that we have definitely made a profit, but there is still an opportunity to make more profit if the price moves up.

Stop Reversal

This is when you place an opposite order at the Stop Loss level. This is an effective way to counteract if you make the wrong trade. In other words, you place a buy order at 1.22432 on EUR USD with a 20 pips stop loss at 1.22232, but you can also place the opposite version of this sell order with a stop loss level of 1.22232.

My favorite is to stop big spikes and hold for a few days

With my system you may only risk 20 pips but 3-4 trades will yield over 100 pips profit You get small difference. Instead of fixing the 50% level, we look at previous major price spikes and set stops at those levels. Price spikes give us a better sense of the true market direction, so there is no better way to maintain that direction than with price spikes. Because the price fluctuates, but in the case of a short sale, the price does not rise until there is a previous spike. Major change of direction.

What is the reward factor ratio, and what is the ideal risk/reward ratio? There is one, It's up to you to find it. It is the Profit Factor Ratio or PFR. Here you can see your win/loss ratio. If it stays above 1 even after many, many trades, the system is profitable.

In fact, not all trading systems demonstrate this key point, but they do demonstrate what it takes to be a profitable trader.

There was one system in particular that I remember. I think it came down to aiming to hold trades for days to maximize profits while only trading one risk at a small amount. Of course, I can't name names here, but the main promise was that most trades were profitable over 100 pips by lunchtime. Now, like all the systems you've read about, they always show the good and cheat the bad. What they don't show you is the reality of how this system works. You can only see reality when you buy the system and experience it for yourself.

In my experience, my trades usually close with a risk premium of 1-4. This means that for every £1 invested, you can expect a return of £4 if the trade wins. This statement is irrelevant. What really matters is the win rate. Or simply your win/loss. If it's greater than 1, you're profitable. It depends on how much above 1, how quickly you can make a profit, and how much you can make. So whenever I trade, I always check if the system is working and make sure the PFR is Sgt;1.

For example, say you made 1000 trades with strike rates from 1 to 4 and earned £20 on each winning trade and £5 on each losing trade. 250 winners and 750 losers expected

Bad at first 750 losers No, no!

250 Winner £20 per win = £5000

750 Loser £5 per loss = £3750


Win/Loss = PFR

5000 / 3750 = 1.33 444 Our P334 444 is a realistic PFR. Trading at £1 per pip means winning £1,250 on 1,000 trades. A profit of £1250 on an investment of £100 means that you have the potential to make big profits. Of course, this is a conservative PFR and there are many systems with higher PFRs. I've read that most systems are realistically just under 2.0. Mine is 1.33.

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