A stop loss is one of the most important order types in trading.

In this tutorial, I'll go over what a stop loss order is, how to implement it, and I'll answer some frequently asked questions at the end.

After you read this tutorial, you'll know everything there is to know about entering a stop loss.

What is a Stop Loss Order?

All trading platforms that I've seen have a stop loss feature.

Some are easier to use than others, but the basic function is the same.

A stop loss order is a type of order that traders use to limit their loss on a losing trade or lock in profits on a winning trade.  

To be more specific, a stop loss is a pending order that only gets executed if price hits your stop loss level.

A pending order is an order that sits on the broker's server until the conditions of the order are fulfilled. In the case of a stop loss, that condition is price hitting the stop loss price.

Once price hits your stop loss price, it turns into a market order, which means that it will execute the trade at the next available opportunity.

That means that there has to be someone in the market who is willing to take the other side of your trade.

In very large (liquid) markets, the trade usually gets filled very quickly and at the price you set. Some examples of markets are large cap stocks, Forex and large cap cryptos like Bitcoin.

However, in small (illiquid) markets, the price that your trade finally executes at might be different from the price that you set your stop loss at. This is called slippage. Some commonly illiquid markets are options, micro cap stocks and altcoins.

If you're trading in an illiquid market, find out if you can enter a stop loss that turns into a limit order instead of a market order.

A stop-limit allows you to set a limit price so you won't lose money if the only available trade is at a price that worse than your limit price.

Not all trading platforms offer stop-limit orders, so be aware of potential slippage before place your stop loss orders.

Traders usually enter a stop loss at the same time that they open a trade.

How to Place a Stop Loss to Limit Losses

The most common use of a stop loss order is to do as its name suggests.

It will limit the loss that you have on a trade.

In the chart above, the red line at the bottom of the chart represents a good place to enter a stop loss order for a long trade.

The trade would be entered at 0.63264 and the stop loss would be at 0.61617.

If price goes lower than 0.61617, then the long trade will be closed.

A stop loss order allows a trader to automatically exit a trade at a predetermined amount of loss, thereby protecting the rest of their trading capital.

Many traders use a percentage loss stop loss which risks only X% per trade. A common amount to risk per trade is 1%.

If you risk 1% per trade, you would have to be wrong 100 times in a row to lose all your money.

Even if you were just guessing, I don't think that you could be wrong 100 times in a row.

Therefore, using a stop loss protects your capital when you're wrong, so you'll be able to take advantage of the times when you're right.

How to Use Stop Losses to Protect Profits

You can also use a stop loss to protect profits.

Let's take a look at the same trade above, but this time, price has moved into profit.

The blue line is the trade entry price and the red line is the new stop loss level.

To protect your profits, you could move your stop loss up to 0.63634, locking in 37.4 pips of profit on the trade.

Moving your stop loss to lock in profit is a great way to ensure that you'll make money on the trade, but also gives you the opportunity to make even more money if the market locks into a strong trend.

Regardless of what happens though, you'll have peace of mind knowing that you've locked in a guaranteed profit.

How to Place a Stop Loss Order on Popular Trading Platforms

Stop loss orders are usually easy to place.

All trading platforms allow you to place a stop loss when you enter a trade. After you enter a trade, you can also edit your stop loss, or enter one if you forgot.

I'll give you a few examples from different trading platforms, so you can see the process in action.

How to Place a Stop Loss in MetaTrader

The MetaTrader order entry screen has a stop loss field just below the volume field.

An easy way to enter a stop loss price is to first click either the up or down arrow next to the stop loss price.

This will automatically enter a price that's close to the current price. Then you can manually edit the price to set your stop loss.

Using this method will save you time and is particularly useful for day traders who need to enter orders quickly.

The process is almost exactly the same in MetaTrader 5. If you want to learn how to set a stop loss and take profit in MT5, read this tutorial.

How to Place a Stop Loss in TradingView

TradingView has the best stop loss screen that I've ever seen.

It allows you to set a stop loss in pips/dollars, at a certain price, or by percentage risk.

To enter an order, right-click on any chart and click on:

Trade > Create new order…

Then the order entry box will appear. Check the box next to Stop Loss and enter your stop loss in your preferred format.

Finally, click on the Buy or Sell button and your order is placed.

How to Place a Stop Loss in thinkorswim

TD Ameritrade has a couple of different trading platforms that you can use, but I'll show you the thinkorswim example because it's the simplest.

Entering a stop loss is pretty complex on this platform, but it's easy once you know how to do it.

While you're entering your entry order, click on Advanced Orders > 1st trgrs OCO.

This will enter a stop loss order once your trade gets filled.

To get a complete tutorial on how the platform works, watch this video.

It shows an older version of the software, but the core principles are the same.

Yeah, I don't know why they make it so complicated.

But now you know how to do it.

How to Place a Stop Loss in Binance

The process of setting a stop loss order in cryptocurrency can vary greatly by exchange.

In this example, I'll show you how to use Binance because it's one of the most popular exchanges.

On Binance, you'll be using the Stop-limit function.

Although this example will be shown on Binance, check with your specific exchange on how to set a stop loss on your trading platform or exchange.

Here's a complete tutorial on how to set a stop loss on the Binance trading platform.

Where Should You Place Your Stop Loss?

Now that you know how to place a stop loss, this is the next question that new traders ask.

Knowing where to place your stop loss comes with practice.

You want to put it in a place where it won't be triggered by normal market fluctuations.

But you also want to set it as tight as possible to make maximum return on your trade.

It's a balancing act.

To learn where to place your stop loss, read this tutorial.

Should You Move Your Stop Loss?

Moving your stop loss to increase your risk means that you'll have a bigger loss than you originally planned for.

That's a recipe for disaster.

There is only one situation when you should move your stop loss…when you want to lock in profits.

How you do this is beyond the scope of this tutorial, but you can learn how to trail you stop loss here.

When you trail your stop loss, you might make way more profit than you would have expected because you are letting your winners run and cutting your losses short.

Do Brokers Hunt Your Stop Loss?

Legitimate, regulated brokers will not hunt your stop losses. 

Who knows what dodgy, unregulated brokers do.

That's why it's important to trade with a reputable broker. 

But if you're trading with a reputable broker and you feel like your stop losses are getting picked off, then this is probably the reason.

Final Thoughts

Once you understand how to set a stop loss order in one market, you'll know how to figure out how to do it in other markets, even if the process isn't exactly the same.

Using a stop loss on your trades is the best way to limit your risk and lock in your profits. If you haven't been using stop losses, then you should really consider using them.

In all fairness, not all professional traders use stop losses.

There are also some trading strategies that perform better when you don't use a stop loss.

But the vast majority of traders and trading strategies perform better with stop losses.

So get to backtesting and figure out the best method for placing your stop loss orders.

The post How to Place a Stop Loss Order appeared first on Trading Heroes.

A stop loss a vital component of a profitable trading strategy.

It limits your risk if you're wrong, and it preserves your capital so you can take advantage of the next opportunity.

This complete tutorial will show you how to calculate your risk and position size, based on your maximum risk. 

Calculate Your Stop Loss

The first step to calculating a stop loss is to measure your stop loss in pips or dollars, or whatever your chart is quoted in.

To calculate your exact stop loss, use this formula:

ABS(Entry – Stop Loss) = Risk

It doesn't matter if the risk number comes out positive or negative. Take the absolute value (ABS) of the entry price minus the stop loss price.

Let's take a look at a few examples from different markets. In each example, the line represents the stop loss.

Stock Trading Example

When you trade US stocks, the risk will be calculated in dollars.

In this example, the stop loss is at 67.50 and the entry price is 59.60.

This is a short trade, so the trade makes money when the price goes down.

So the risk is: 67.50 – 59.60 = 7.90.

Forex Trading Example

In Forex, risk is calculated in pips or pipettes, depending on how the broker quotes prices.

The price is quoted in the second currency in the pair, or the quote currency.

For example, in the EURCHF chart below, the chart is quoted in Swiss Francs since CHF is the second currency.

The stop loss is at 0.97068 and the entry price is at 0.98609.

So the risk is: 0.98609 – 0.97068 = 0.01541.

This translates into 154.1 pips of risk.

Crypto Trading Example

Crypto can be a little tricky because trading pairs are quoted in different formats, depending on which crypto is the quote currency in the pair.

This is the Monero/US Dollar pair, which is quoted in US Dollars.

The risk on this long trade is: 134.23 – 115.332 = 18.898.

Now that you have a good idea of how this works, let's take a look at how to calculate your percentage risk per trade based on your calculated stop loss.

How to Calculate Stop Loss Percentage

Once you've calculated the stop loss in quote value, now it's time to figure out your position size based on your percent risk.

This is very important because you want to keep your risk per trade constant.

If you don't keep your risk constant, you might lose too much on one trade and not make enough on the next trade to make up for the loss.

For example, let's say that you risked 3% on your first trade and it was a losing trade. Then you risked 1% on your next trade and it made a profit of 1%.

You would still be down 2%, even though you had one win and one loss.

If you risked 1% per trade and targeted 1% profit on each trade, you would have been at breakeven.

When you keep your risk per trade constant, that eliminates one variable from your trading and allows you to focus on more important things like your win rate and your return per trade.

In these examples, I'm going to assume that you have a $10,000 account and you're risking 1% per trade.

One percent of $10,000 is:

10,000 x 0.01 = $100

So all of the trades below will only take $100 of risk.

Now I'll show you how to figure out the amount of shares, units or cryptocurrency to buy or sell.

I'm going to use the same risk amounts in dollars and pips from the examples in the previous section.

Stock Trading Example

In the example above, there was 7.90 of risk per share on that stock trade.

So to get the number of shares that you should trade, simply divide the total risk you want to take ($100) by the risk per share ($7.90).

$100 / $7.90 = 12.6

Therefore, you should sell short 12 shares of stock in this example.

Forex Trading Example

It can be a little tricky to calculate your total trade size in Forex because there are different lot sizes and the risk per pip varies between currency pairs.

If you don't know anything about Forex lot sizes, you can learn about them here.

To make things easier, you can use a position size calculator like this one.

But I'll show you the calculation so you know now to do it yourself.

In the example above, the long trade has 154.1 pips of risk.

Let's just say that you want to trade micro lots. These lots have a risk of about $0.10 per pip, depending on the currency pair.

But I'll use $0.10 just for demonstration purposes.

First, multiply the pips of risk times the cost per pip.

154.1 x 0.10 = 15.4

That gives you $15.40 of risk per micro lot.

Then divide the total risk by the risk per micro lot.

$100 / $15.40 = 6.49

So in this example, you can trade 6 micro lots to only have 1% risk in your account.

Crypto Trading Example

Since this crypto chart is quoted in US dollars, the calculation is similar to the stock trading example.

$100 (total risk) / $18.898 (risk per coin) = 5.2915652

Cryptocurrency can be divided beyond 2 decimal points, so in this example, you would be able to buy 5.2915652 Monero coins.

If the coin/token you're trading is quoted in another cryptocurrency, then:

1. Calculate the risk in the quote currency
2. Convert the quote currency to US Dollars (or whatever your trading account is denominated in)
3. Divide your total risk ($100 in this example) by the risk per coin/token in US Dollars to get the number of coins/tokens to trade

That's it!

Easy.

Frequently Asked Questions

What's a Trailing Stop Order and Should You Use One?

There are several different ways that a trailing stop loss can be implemented.

They can help you lock in profits as your trade moves into profit.

You can learn about the most used types of trailing stops here.

In that article, I also show you which one to avoid.

Where Should You Set Your Stop Loss

The next question is obviously, where should you place your stop loss.

That will depend on your trading system.

If you want to see different trading strategies, then take a look at the strategies I've written about and tested.

But the basic idea is that you want to put your stop loss in a place that's not easy for the normal fluctuations of the market to get to.

At the same time, you want to put the stop loss in a place that will show you that you're wrong about the trade. 

Brokers don't hunt your stop losses.

Many new traders believe this because they get stopped out so often.

In reality, most new traders put their stop loss to close to their entry and simply get stopped out by normal volatility.

Here are 2 examples of stop loss levels that 2 traders might choose.

A newer trader will usually choose a stop that's too close to price action…

While a more experienced trader will usually select a stop loss level that's further away, as shown above.

So the bottom line is that you want to select a stop loss price that proves you're wrong, but also isn't so close to your entry that it can get stopped out easily.

Final Thoughts

A stop loss is the best way for traders to manage risk.

…especially new traders.

When you have a trading plan that includes a stop loss, you know exactly how much you'll lose if you're wrong about the trade.

If you don't have a trading plan, then learn how to create one here.

There are some trading methods that do not use stop losses, but they should only be used once you have a little experience.

The post How to Calculate a Stop Loss appeared first on Trading Heroes.

Traders use a trailing stop loss to take advantage of trends and maximize their profit per trade.

In reality, nobody knows exactly when a trend will end.

Therefore, if you set take profit price, you'll lose out on a lot of profit if price keeps moving in the direction you expected.

A trailing stop loss will allow you to flow with the market and ride big moves.

Before I get into the actual methods, let's first look at the advantages and disadvantages of using trailing stop losses.

Advantages of Using a Trailing Stop Loss

The biggest advantage of using a trailing stop loss is that it gives you a systematic way of letting your profits run. 

This has a huge psychological benefit. 

If you don't have a plan, there can be the tendency to doubt yourself and feel like you missed out on profits.

In other words, you'll have FOMO, or the fear of missing out.

But when you have a tested plan, you know what to expect.

So even though one trade did not work out as well as you wanted, you know that over the course of many trades you'll make more money than if you didn't use the trailing stop.

Disadvantages of Using a Trailing Stop Loss

Using a trailing stop loss is not a guarantee that you'll make more money.

So you'll have to test a trailing stop with your entry, to see if it's a good fit.

A potential downside with trailing stops is that you'll give up some profits because you're exiting when price retraces.

This can be tough for some traders to handle on a psychological level.

Ask yourself if you don't mind giving up some short-term profit, in exchange for potentially gaining more profit on big moves.

Another disadvantage is that you might find that you break even more often.

There is always going to be a trade off between capturing more profit and having a higher win rate.

If you're the type of person who likes to have a high win rate, then trailing stops might not be for you.

However, you prefer to maximize your overall return and you don't mind a lower win rate, then you should totally look at using a trailing stop.

Now that you know the benefits and downsides, let's get into the proven methods that you can use.

1. Close Beyond a Moving Average

A close on the other side of a moving average is one of the easiest ways to trail your stop loss.

It's easy to spot a close beyond a moving average, so there's no room for overthinking or interpretation.

For example, let's say that you went short at the arrow on this chart.

You might have been tempted to exit on the first drop, or on the first retracement.

But by using a moving average as your trailing stop loss, you would have been able to capture more profits by waiting for a close above the moving average, as shown above.

Obviously, there are different types of moving averages and different settings.

If you don't know where to start, then you can test out these 3 settings and see how they work for you.

• 20 period exponential moving average
• 50 period exponential moving average
• 100 period exponential moving average

Backtest the different moving average settings and see which one is the most profitable.

Then don't be afraid to test out your own settings, based on your observations.

2. Risk Multiple Trailing Stop

Another trailing stop method that's not widely talked about, but can be very effective, is the risk multiple trailing stop.

The concept is simple, you trail your stop loss every time price gets to a multiple of your stop loss, in points.

For example, let's say that you had a 100 pip stop loss when you entered your trade.

This is the risk multiple, otherwise known as the R multiple.

In this case 1R is 100 pips.

So when price hits 100 pips in profit, you might want to trail your stop loss to breakeven.

From there, if price hits 200 pips of profit (2R), you maybe you trail your stop loss to 100 pips (1R) of profit.

That's a good place to start, but you can also experiment with using different risk multiples to move your stop loss.

You might move your stop to breakeven when price hits 2R.

…or you might want to start trailing your stop loss by 1R as soon as price hits 3R.

There are many possibilities for you to experiment with.

To take the work out of trailing your stop loss by R, our Trailing Stop EA for MetaTrader makes it easy.

It automatically sets up the trailings stop as soon as you enter a trade.

In this short trade example, the EA will move the stop loss to breakeven when price hits 2R, then trail the stop loss by 1R when price hits 4R.

The best part about this method is that it automatically takes market volatility into account. 

If the market is volatile, the stop loss will be wider and the R levels will be wider.

Then you can ride out volatile spikes more easily.

When the market is quiet, the stop loss will be smaller and price has to move less to hit your R levels and start locking in profits.

3. Moving Average Crossover

When moving averages cross, that can be a good indication that a trend is coming to an end.

A popular moving average crossover trading strategy is the Golden/Death Cross.

This is usually used to trade stock market indexes, but it can also be used in other markets.

The best part about this trailing stop method is that it's very exact.

It's obvious when the moving averages cross.

There's no analysis or discretion involved.

As soon as you have a closing candle with a crossover, you exit the trade.

4. Support and Resistance

Support and resistance levels can be great ways to trail your stop.

These levels take into account the current volatility of the markets and are usually easy to spot.

Here's an example of how trail your stop loss in this downtrend in the EURUSD.

The only real downside to using this method is that there is some discretion involved when drawing support and resistance levels.

You have to be patient and let the support levels develop, or you can move your stop loss too early and get stopped out prematurely.

To prevent this, look for a strong move away from a level before moving your stop loss.

5. Parabolic SAR (PSAR)

If you prefer indicators, the PSAR is another easy way to trail your stop loss.

This indicator provides clear levels to set your stop loss on every candle.

In the chart below, the PSAR dots are the levels where you would place your trailing stop loss.

Traders will usually trail their stop loss by 2 or 3 previous levels so they can ride the trend.

On the downside, the PSAR may not capture a long term trend because it tends to be a little more sensitive than other trailing stop loss methods.

In order to compensate for this, you can make the settings less sensitive, or use the indicator on a higher timeframe.

For example, you might be trading on the 4 hour chart, but you could use the PSAR on the daily chart to trail your stop loss.

6. 3-Candle Exit

This method trails your stop loss fairly tightly, so it's great for markets that tend to have strong breakouts, but price snaps back quickly.

Here's how it works…

Once your trade is in profit, trail your stop loss in the following way:

• Your stop goes above the high of the 3rd candle back, in a short trade
• Your stop goes below the low of the 3rd candle back, in a long trade

Move your stop loss with every new candle that prints. 

As you can see, your stop loss moves with price, which allows you to take advantage of big candles.

But as soon as price starts consolidating or retracing, you are stopped out and you take your profits off the table.

Here's an example of a short trade.

This short trade is in profit, so it's time to start trailing the stop loss.

At the current candle, you count 3 candles back.

Then place the stop loss above the 3rd candle.

As each new candle closes, the 3rd candle also moves forward and you move your stop loss accordingly.

Easy, right?!

7. Percentage Retracement

The final method that I want to share with you in this tutorial is to exit a trade after price has retraced by a certain percentage of the high or low of the move.

This method is a little different from the others above, in that you're using the last extreme move.

So let's say that you determine that when price retraces 12%, that's a good time to exit the trade.

Here's a long example, where price has retraced 13% from the high of the move at 86.38.

If you used a percent retracement trailing stop, you would have exited just before price moved lower to 70.

In order figure out the best retracement setting to use, be sure to do extensive backtesting in the market that you're trading.

This method is usually used in the stock market, but test it out in the market you trade.

Remember that every market has its own personality, just like us humans.

So each individual market and even each currency pair or stock might need to use a different retracement setting.

Trailing Stops You Shouldn't Use

Knowing which trailing stop methods to avoid is just as important as knowing which ones to use.

There are 2 common trailing stop loss methods that you should avoid.

Fixed Point Value

The first method that is sometimes taught online is to trail the stop loss by a fixed point value.

So let's say that you set a trailing stop value of 25 pips.

Every time price moves 25 pips, you move your stop loss 25 pips to lock in your profits.

This sounds great in theory and it's easy to implement.

However, it does not take into account the volatility in the market you're trading.

If you trade a lower volatility pair like the EURGBP, then 25 pips might work well.

But if you trade a more volatile pair like the GBPJPY, then 25 pips will probably be too small and you'll get stopped out a lot.

The bottom line is to avoid using a fixed value trailing stop.

Built-in Trailing Stop on Trading Platforms

Some trading platforms, especially Forex platforms, have a built-in trailing stop feature and some new traders might be tempted to use it.

This is actually one of the worst ways to trail a stop loss.

Here's why…

The trailing stop loss on trading platforms usually trails your stop loss by fixed point value and trails it on every tick.

As I demonstrated above, using a fixed point value by itself is not useful because it does not take into account the current volatility of the market.

But using a tick-by-tick trailing stop is even worse.

When you use this type of trailing stop, the stop loss starts trailing as soon as the trade moves in a positive direction.

Even if the trade isn't profitable yet.

Again, that might sound great in theory.

But the reality is that this type of trailing stop “strangles” the trade too quickly and you'll usually find yourself getting stopped out at a small loss, or having just a small profit and missing out on a big move.

So avoid this type of trailing stop loss and test out the methods on the list above.

Which Trailing Stop Strategy is Best?

In reality, there's no one best trailing stop loss strategy for everyone.

Your trailing stop method has to be a good fit with your entry and your trading personality.

Therefore, the best way to start implementing a trailing stop is to get data on your current trading strategy without a trailing stop.

Knowing these stats will give you a baseline to compare with your strategy with a trailing stop.

Assuming your test is profitable, then test different trailing stop methods with your entry.

The data will tell you which trailing stop method is best to use.

Final Thoughts

So there are 7 trailing stop loss methods that can increase your average profit per trade by letting your winners run.

Sometimes the improvement in your return can be dramatic when you add a trailing stop.

But like with all things in trading, be sure to test your trailing stop method extensively before you risk real money.

The strategy you use has to match your entry and your trading personality.

Try a few different trailing exits, get some stats and pick the one that works best for you.

Also explore other trailing stop methods not mentioned in this tutorial.

Have fun!

The post How to Use a Trailing Stop Loss (7 Ways to Lock in Profits) appeared first on Trading Heroes.