What is a Oil Stop Loss Order? & Factors to Consider When Setting

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

It is a predetermined point of exiting a losing transaction & it's meant 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 the 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 might 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 more challenging things in in Oil Trading is setting these orders. Put the stop loss too close to your entry price & you're liable to exit the trade position because of some random market volatility. Set it-toothe-stop-loss-order-too far away & if you are on the wrong side of the market trend, then a small loss might turn into a large 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 crude trading 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 & then seeing the crude trading price retrace to that level, or just below it, & 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 an 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 ardently placing 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 in the market, this is because the most unbiased analysis is done before entering a trade position. After entering the market a trader will tend to analyze 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 & significantly affect the crude trading price: this is why it is so important to have a stop loss. Its best to cut losses early when a position is going against you, it is best to cap 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're most objective.

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

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

If you bought 1 standard lot of a oil 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 exited the trade position at the max loss allowed. The topic of Oil Trading risk management is wide and it's discussed under money management topics.

• Crude Oil Money Management Introduction
• Oil Trade Money Management Methods

Factors to Consider When Setting

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:

Because there are no guidelines cast in stone as to where you should place 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 one transaction. General rule is that a trader should never lose more than 2 percent of the total account capital on any one single transaction.

2. Volatility - this refers to the daily crude trading price range of a crude oil. If a crude trading price regularly moves up and down in a range of 100 pips or more over the course of the day, then you can't set a tight stop loss order. If you do, you will be taken out of the trade transaction by normal volatility.

3. Risk to reward ratio - this is the measure of potential reward to risk. If the market conditions are favorable then it is possible to comfortably give your trade more space. 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:reward ratio is not in your favor & 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 large in percent terms. This means that you have to set a tight stop which might be taken out more easily. In most cases it is better to shift to a smaller trade transaction so-as-tosothat-to allow your trade position more space 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'll 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 tight stops. If this is case, you should think seriously about whether you have enough capital to trade Oil in the first place.

6. Market conditions - If the crude trading price is trending up-wards, 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 or not execute any transactions at all.

7. Chart Time Frame - the bigger the chart timeframe you use, the bigger 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 chart timeframes and you figure out the crude trading price will be move up it doesn't make sense to set a very tight stop because if the price swings a little, your order will be hit.

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

The procedure of how to set these stops that you select should also follow the guide-lines above, even if not all, those which to your crude strategy.