Trade Gold Trading

What is a StopLoss? & Factors to Consider When Setting

A Stop Loss Order is an order established after initiating a trade, aimed at minimizing losses if the price trend moves against you.

A stop loss sets a planned exit for bad trades to limit damage.

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 set level is attained, your open position is liquidated.

These orders limit losses for traders. They close the trade if price hits a level that goes against the gold position.

No matter what you hear from others, there's no doubt that whether you should use these trading instructions or not - you definitely should always use them.

One of the trickier things about Gold is when you set up these orders. If you don't put the stop loss far enough away from your starting trade price, you could end the trade because of normal changes in the market price. However, if you put the stop-loss order too far away, and the trend is going against you, then a small loss could become a much bigger one.

Critics note downsides to these orders. They lock you into selling at lower prices if the trade goes wrong. You miss out on higher ones.

Some doubt the use of stop orders because they can lead to leaving a trade right before the market turns your way. Many traders know this from experience. They set the order, watch the price dip to that point or a bit lower, then see it follow the original trend. A trade that could have earned money ends up as a loss.

Seasoned traders invariably incorporate stop loss orders, recognizing them as an indispensable element of the discipline vital for success, as they actively prevent minor losses from escalating into major ones. Moreover, by deliberately positioning these orders every time a new trade is initiated, you accomplish this critical decision-making process during a phase when you are least influenced by current market conditions. This is because the most objective analysis occurs *before* opening a transaction. Once the trade is live, an individual tends to analyze the market differently due to developing a positional bias toward the direction of their current trade analysis.

Unexpected news can surface quickly and greatly change the price, highlighting the importance of having a stop order in place. It is best to reduce trading losses early when a trade is not working out: it is better to cut losses immediately rather than letting them grow larger. Additionally, setting your stops when you first start a trade helps maintain objectivity.

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 started a trade, you should not risk losing more than $1,000. In that case, you would set your stop order at the number of pips that equals $1,000, and you would have $49,000 left in your account if you closed the trade at the biggest loss allowed. Risk management is a big topic, and we talk about it in the money management lessons.

What to Consider When Setting

The most important thing is how close or far this order should be from the price where you started. Where you set it depends on things like:

There aren't any hard rules about where to set these chart levels. We generally stick to common guidelines to help set them the right way.

Some of the general guidelines used are:

1. Risk Assessment: This addresses the maximum acceptable loss for any single trade. The established guideline suggests that a gold trader should never risk exceeding two percent of their total account capital on one trade.

2. Volatility - this term describes the price variation observed in daily trading. If gold frequently fluctuates by 100 pips or more throughout the trading day, placing a tight stop order would be unwise. Doing so may result in getting stopped out of a gold trade because of the usual market fluctuations.

3. Risk to Reward ratio - this is the measure of the potential risk to reward. If the market conditions are favorable then it is possible to comfortably give your trade more space. However, if the market is too choppy/range bound it then becomes risky to open/execute a trade 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 for a trader to look for a much better trade next time.

4. How big the position is - if the position you start is too big, even a very small change in the price will be a pretty big change in terms of percentage. This means you have to set a stop loss that is very close, which could be reached more easily. It's often better to make the trade position smaller so your trade has more space to move around by setting a normal level for this order while also keeping the risk in check.

5. In terms of account equity, if your trading account is under-capitalized, it may restrict you from setting appropriate stop losses since you might need to risk a significant portion of your capital on a single trade, necessitating tighter stop placements. In such cases, it's crucial to evaluate whether you have enough funds to trade XAUUSD effectively.

6. Market conditions - If the trading price is trending upwards, a tight stop may not be necessary. If on the other hand 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 choice of placement for your orders will largely be influenced by your trading style. The most frequently employed technique for setting these limits is utilizing support and resistance areas. These zones provide excellent locations for order placement due to their high reliability, as support and resistance levels tend not to be breached repeatedly.

Set your chosen stop levels to match the rules listed earlier. Do this even if not every rule fits your plan.

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