What is a Energies Trading Stop Loss Order? and Factors to Consider When Setting

Stop Loss Energies Order is a type of order that is placed after opening a trade that's intended to cut losses if the market moves against you in the opposite trade direction.

It's a preplanned level of getting out of a losing trade transaction and it's designed to control losses.

A stop loss is an order placed with your broker that will automatically close your trade transaction when it reaches a predetermined price. When set level is reached, your open trade is liquidated.

These orders are intended to restrict the sum of money that one can lose: by exiting the transaction if a specific price that's against the trade is reached.

Regardless of what you may be told by others, there's no question about if these orders should or should not be set - these orders should always be set.

One of the most troublesome things in in Energies Trading is setting these orders. Put the stop loss too close to your entry price and you are liable to exit the trade transaction due to random market price volatility. Set it-toothe-stop-loss-order-too far away and if your'e on the opposite side of the trend, then a small loss may turn into a big one.

Skeptics will point out several disadvantages of these orders: that by placing them you are guaranteeing that, should your open position move in the wrong direction, you will end up selling at lower prices, not higher.

The critics will also argue that in setting stops you are vulnerable to exit a transaction just before the market moves in your favor. Most investors have had the experience of setting a these orders and then seeing the price retrace to that level, or just below it, and then go in direction of their original market trend analysis. What may have been a profitable trade transaction rather turns into a loss.

Experienced traders always use stop loss orders as they are a crucial part of the discipline required to succeed because they can limit a small loss from becoming a large one. What's more, by purposefully putting these orders whenever you enter a position, you end up making this important decision at the point in time when you are most objective about what is really happening with market, this is because the most unbiased analysis is done before entering a trade position. After entering the market an investor will tend to interpret the market differently because they have a bias towards one-sidea-particular-side, the direction of their market technical analysis.

Unexpected news can come out of the blue & dramatically affect the price: this is why it's so crucial to have a stop order. Its best to cut losses early when a trade transaction is going against you, it's best to cut your losses immediately instead of waiting it to become a large one. Again, if you put your stop orders when you're opening a trade transaction, then that is when you are most unbiased.

A key question is exactly where to place a this order. In other words, how far should you place this below your purchase price? Many traders will tell you to set pre-determined - maximum acceptable loss, an amount that's based on your account balance rather than use technical indicators of the energies instrument in question.

Professional money managers state that you shouldn't lose more than 2% of your account equity on any one energies transaction. If you have $50,000 in capital, that then would mean the max loss that you should preset for any one transaction is $1,000.

If you bought 1 standard lot of a energies instrument, then you'd limit your risk to no more than $1,000. In that case you'd set your stop loss order at 100 pips (points) and would have $49,000 left in your account if you closed the trade transaction at the maximum loss allowed. The topic of Energies Trading risk management is wide & it is covered in the money management topics.

• Energies Trade Money Management Introduction
• Energies Trade Money Management Methods

Factors to Consider When Setting

The most important question is how close or how far this order should be from the price where you entered the position. Where you set will depend on several factors:

Since there aren't any guidelines cast in stone as to where you should place these levels on a chart, we follow general rules which are used to help set these levels correctly.

Some of the general guidelines used are:

1. Risk - How much is one willing to lose on one transaction. The general rule is that a trader should never lose more than 2 percentage of the total account capital on any one single transaction.

2. Volatility - this refers to the daily price range of a energies. If a energies instrument routinely moves up & down in a trading range of 100 pips or more during the course of the day, then you cannot put a tight stop order. If you do, you will be taken out of the trade transaction by the normal market volatility.

3. Risk to reward ratio - this is the measure of potential reward to risk. If the market conditions are favorable then it's possible to comfortably give your trade more room. However, if the market is too choppy it then becomes too risky to open a transaction without a tight stop then don't make the trade at all. The risk to reward isn't in your favor and even placing tight stop orders won't guarantee profitable results. It would be more wiser to look for a better trade position the next time.

4. Position size - if the position size opened is too big then even the smallest decimal price movement will be fairly big in percent terms. This means that you have to set a tight stop loss order which may be taken out more easily by the market. In most cases it's better to adjust to a smaller trade position size so-as-tosothat-to give your trade transaction more room for fluctuation, by putting a rational level for this order while at same time capping risk.

5. Account Capital - If your account is under-capitalized then you will not be able to set your stops accordingly, since you will have a big amount of money in a single trade transaction which will obligate you to put very close stops. If this is the case, you should think seriously about whether you have enough capital to trade Energies in the first place.

6. Market conditions - If the price is trending upward, a tight stop may not be necessary. If on the other hand the price is choppy and has no clear direction then you should use a tight stop loss order or not open any positions at all.

7. Chart Time Frame - the bigger the chart timeframe you use, the bigger the stop should be. If you were a scalper trader your stops would be much tighter than if you were a day or a swing trader. This is because if you are using longer chart time frames and you determine the price will be move up it doesn't make sense to set a very tight stop because if the price swings just a little, your order will be hit.

The method of setting that you choose will significantly depend on what type of trader you are. The most oftenly used method to determine where to set is - resistance and support zones. These areas give good points for setting these stop orders as they are the most reliable zones, because the support & resistance levels won't be hit many times.

The guide of how to set these stops that you choose should also follow the guidelines above, even if not all, those that to your energies strategy.