Stop Loss Order
A market order to close an open position if the value of the asset reaches a certain level. The stop-loss order is a risk management device that determines the maximum loss a trader is prepared to take on that position.
Stop Loss / Take Profit - text
An order refers to how a trader enters or exits a trade.
In this video we will be discussing the stop loss and limit orders
Ok let look at Stop-Loss Orders
A stop loss order is an order linked to an open market position to sell that position when it reaches a certain price. They are also known as a “stop order” or a “stop-market order”.
You are not going to get every trade right so…… limiting your exposure by placing stop loss’s on all trades is highly advisable
Ok so Let’s look an example of using a stop loss.
On this 1 Day Chart we enter a buy market order at 1560 with the belief the market price will continue to rise.
We place out stop loss order at a price of 1540.
We have placed our stop loss here to protect our position in the event of a trade not going in our favour.
So what happened over the next few days.
Well as we can see Gold Prices collapsed
Our Stop Loss was Triggered at 1,540, closing our position automatically at this price.
In this instance we have taken a loss on the trade, however the upside is that if we did not have a stop loss order in place and we were not monitoring our trade we could have wiped our whole trading account out with such an extreme downside move in Gold.
The only difference with a sell trade is that your stop loss order would be above your market order
Ok, Lets look at Limit Orders
Let’s look at an example on a day chart
We expect the price to rise and we execute a market buy order at 1.4100
We set our limit order at 1.4250 meaning that if the market hits this price our trade will close
The following day our limit order gets triggered automatically and we lock in our profit of 150 pips. The monetary value of the 150 pips will be based on our position size.
Establishing your trade exit is just as important as establishing your entry, if not more , so setting a limit order can be just as important as a stop loss particularly if you do not have the time to constantly monitor your open trade positions.
So what have we learned
A stop loss order is used to limit your potential exposure on a trade
A limit order locks in profits at a pre-set price