Using stops

In this lesson we’ll take a look at how you can use both stop-loss and stop-entry orders to add discipline to your trading – minimising your risk, aiding planning and locking in running profits.

Using a stop-loss

Before opening a position, think about the maximum you are prepared to lose on that trade. Remember, if you want a healthy risk-to-reward ratio you need to control the amount of risk on each trade – which you can do by setting a stop-loss (a ‘normal’ stop in our platform).

As a guide, many traders wouldn’t risk more than 1% of their account equity on a single trade, and you should never risk more than 10%. By limiting your risk to 1%, you’ll still have at least 99% of your account equity if the trade doesn’t go your way.

Once you’ve determined what percentage of your capital you’re comfortable risking on a trade, you can figure out where to put your stop.

By putting a stop-loss on your trade you automate closing at a predefined level, removing any temptation to leave the position open for longer in the hope that the market will bounce back.

It’s also important that you commit to a stop once you’ve placed it. A common mistake traders make is to set a stop, only to keep moving it further away from the current market price to prevent the trade being stopped out – eventually losing as much money as if they hadn’t applied a stop at all.

Guaranteeing your stops

With all orders there is a risk of slippage – during times of volatility it might not be possible to fill a basic stop-loss at exactly the amount you set. By setting a guaranteed stop you remove this risk, only paying a small premium if the guaranteed stop is triggered.

You can set guaranteed stops easily in the deal ticket. Just select ‘guaranteed’ from the ‘stop’ drop-down.

Using a stop-loss to lock in profit

Stops aren’t just for protecting against risk – you can also use trailing stops to lock in your profits at the same time.

Trailing stops automatically adjust to market movement, meaning they follow your position if the market moves in your favour – and close the position, locking in profits, if the market then moves against you.

You can choose a trailing stop in the deal ticket – just select ‘trailing’ from the ‘stop’ dropdown.

As your stop moves closer (or even past) the opening price, your risk-to-reward ratio improves.

Remember that trailing stops aren’t guaranteed, so they can be subject to slippage.

If you’re watching a position and the market is moving in your favour, you can also lock in profit by manually moving a basic or guaranteed stop to follow the market. You can do this by editing your stop in the ‘positions’ panel:

Or by manually dragging your stop level on a market’s chart:

Remember, while it’s ok to move a stop closer to a market that’s moving in your favour, it’s not good practice to move a stop away from a market that’s moving against you.

Using stops to open

You can also use stops to open positions – we call these stop-entry orders. They’re a good tool when you want to take advantage of market momentum and enter a market once a trend has been confirmed.

You can set them in the ‘order’ tab of the deal ticket. You’ll know that you’re setting a stop-entry, because the button you click to place the order will automatically update with your order type dependent on the opening level you choose.

Stop-entry orders are a good tool if you think you might be tempted to act impulsively on market movement, even when your analysis suggests you should wait for a particular trend to be realised before taking your position.