Mastering Risk: Stop Loss in Trading
Types of Stop Loss
Money Stop
Definition: A trader sets a fixed amount they are willing to lose on a trade, for example, £20.
Issue: This approach often leads to larger losses because it doesn’t align with market movements.
Advice: Avoid using the money stop.
Time Stop
Definition: Used mainly by scalpers, this involves closing a trade if it doesn't move in the expected direction within a set time frame (e.g., 4-8 bars).
Key Point: It requires discipline to adhere to the set time limit.
Advice: Suitable for scalpers.
Technical Stop Loss
Definition: Based on price movements and market structure, this is the most effective stop loss for technical traders.
Types:
Initial Stop Loss: Set at the entry of a new position, usually at a momentum high or low. The trade remains valid as long as the price doesn't reach this point.
Technical Trailing Stop: Used to protect gains on a winning trade. As the price moves in your favor, adjust the stop to a new structure point that, if reached, invalidates the trade.
Money Stop
Definition: A trader sets a fixed amount they are willing to lose on a trade, for example, £20.
Issue: This approach often leads to larger losses because it doesn’t align with market movements.
Advice: Avoid using the money stop.
Time Stop
Definition: Used mainly by scalpers, this involves closing a trade if it doesn't move in the expected direction within a set time frame (e.g., 4-8 bars).
Key Point: It requires discipline to adhere to the set time limit.
Advice: Suitable for scalpers.
Technical Stop Loss
Definition: Based on price movements and market structure, this is the most effective stop loss for technical traders.
Types:
Initial Stop Loss: Set at the entry of a new position, usually at a momentum high or low. The trade remains valid as long as the price doesn't reach this point.
Technical Trailing Stop: Used to protect gains on a winning trade. As the price moves in your favor, adjust the stop to a new structure point that, if reached, invalidates the trade.