Stop losses can be useful if you're unable to continuously monitor your trades.
Example stop loss order
Here we have an order of the AUS200, where an order was placed at 5066 with a stop loss at 5026. If the price falls below 5026, the stop loss market order will sell the position and close the trade at the next available price. In this example, the loss for the position was 40 points.
Do note that stop loss orders aren’t guaranteed to execute at a specific price, as there may be gaps appearing in the market which could cause an exit at a different price. Market gapping is when there’s a sudden movement in the market over a very short period of time.
Where to place your stops
Something to think about is where to place your stop losses once you’ve entered into a trade. A stop loss should be placed based on your personal risk tolerance, but should also be an area where you don’t get stopped out too quickly – consider allowing your trade some room to work out. It’s generally recommended that you place your stop loss in an area where you’re only risking between 1-5% of your total capital.
Experienced traders tend to place their stop losses around areas of support or resistance – the areas where the price bounces and reverses.
A trailing stop moves every time the price moves a certain distance. In other words, a trailing stop will automatically ‘trail’ behind the price when the price moves further into profit. This allows you to lock in profits and semi-automatically manage your trade.
You can specify your stop loss to move up five pips every time the price moves up five pips – ideal for when you’re not around to manage your positions. If your stop loss moves up automatically and the pricing action begins to move in the opposite direction, the stop loss will remain where it is and, if reached, you’ll be stopped out –trailing stop losses can be an effective strategy in reducing your losses.
Profit target is a pre-determined price where you’d exit a profitable position. Before you enter a position, you should determine where your take profit is going to be. Profit targets are an important part of order management, as it helps you to automatically exit the market at the price you planned for — even if you’re not watching your screen at the time the price is reached.
The above chart displays a long trade with a set profit target. As soon as the price reaches the profit target, you’ll be exited at the best available price.