What is a StopLoss? & Factors to Consider When Setting

StopLoss Order is a type of order which is set after opening a trade that's intended to cut losses if the market trend moves against you.

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

A stoploss order is an order placed with your trading broker that will automatically close your trade when it reaches a pre-determined price. When the set level is attained, your open position is liquidated.

These orders are designed to cap the amount of money which trader can lose: by exiting the transaction if a specific price that is against the Gold trade is reached and attained.

Regardless of what you might be told by others, there is no question about it that whether if these trading orders should or shouldn't be used - they should always be used.

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

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

Skeptics also will argue that in placing stops you are susceptible to exit a trade transaction just before the market moves in your favor. Most traders have had the experience of setting a these orders & then seeing the price retrace to that level, or just few points below it, and then go in the market direction of their initial price trend analysis. What may have been a profitable trade now instead turns in to a loss trade.

Experienced traders always use stop loss orders as they are a crucial and important part of the discipline that is required to succeed because they can prevent a small loss from becoming a big one. What's more, by purposefully putting these orders whenever you enter a trade position, you end up making this crucial decision at the moment in time when you're most unbiased about what is really happening with the market, this is because the most objective analysis is made before opening a trade transaction. After opening the market one will tend to analyze and interpret the market much differently because now they have a bias toward a particular side, the direction of their trading analysis.

Unexpected news can come out of nowhere & dramatically affect the price: this is why it's so crucial to have a stop order. Its best to cut trading losses early when a trade transaction is going against you, it's best to cut your losses immediately instead of waiting for the loss to become a big one. Again, if you set your stops when you're entering a trade, then that's when you're most unbiased.

A key question is exactly where to place and set this order. In other words, how far should you set this below your purchase xauusd gold trading price? Many traders will tell you to set and place a pre-determined - max acceptable loss, an amount that is based on your account equity balance rather than use technical indicators.

Professional money managers state that you shouldn't lose more than 2% of your equity on any 1 trade transaction. If you've got $50,000 in capital, then that would mean maximum loss you should set for any single trade is $1,000.

If you opened a trade, then you'd cap your trading risk to no more than $1,000 dollars. In which case you would put your stop order at the number of pips that are equal to $1000 and would have $49,000 left in your account if you closed the trade at the maximum loss allowed. The topic of risk management is wide and it is discussed in the money management lessons.

What to Consider When Setting

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

Since there aren't any rules cast in stone as to where you should put these zones 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 a single trade. The general rule is that a gold trader should never lose more than two % of the overall total account capital on any one trade.

2. Volatility - this refers to the daily trading price range. If gold regularly moves up and down in a range of 100 or more pips over the course of the trading day, then you can not put a tight stop order. If you do, you'll be taken out of the Gold trade by the normal market volatility.

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

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

5. Account Equity - If your trading account is under-capitalized then you will not be able to set your stop losses accordingly, because you'll have a big amount of money in a single trade which will obligate you to put very close stops. If this is the scenario, you should consider very seriously about whether you have sufficient capital to trade XAUUSD in the first place.

6. Market conditions - If the trading price is trending upwards, a tight stop may not be necessary. If on the other hand the price is choppy & has no clear market trend direction then you should use a tight stop loss order or not execute any transactions at all.

7. Timeframe - the bigger the chart timeframe you use, the larger the stop should be. If you were a scalping your stops would be tighter than if you were a day or a swing trader. This is because if you're using longer trading time frames and you figure out the trading price will be move upwards it does not make any sense to put a very close stop loss because if the price swings just a little, your order will be hit.

The method of setting that you select will mostly depend on what type of trader you're. The most commonly used technique/method to determine where to set is - resistance and support zones. These zones give good areas for placing these orders as they are most reliable, because the support and resistance zones will not be hittaken-out many times.

The technique of how to set these stops that you select should also adhere to the guide-lines above, even if not all of those who apply to your strategy.

Learn More Tutorials and Courses:

Trade Gold Trading

What is a StopLoss? & Factors to Consider When Setting

What to Consider When Setting