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A stop-loss order is a risk management tool that you should consider as part of your trading strategy. It is a market order that helps manage trading risk by specifying a price at which your position closes out, if an instrument’s price goes against you. Financial markets are renowned for periods of rapid fluctuation and volatility, so it can prove highly valuable to implement a stop-loss order on your trades. This article will explain the different types of stop-loss that we offer on our Next Generation trading platform, along with how to place a stop-loss on your trading charts.
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What is a stop-loss?
A stop-loss order is a market order that helps manage risk by closing your position once the instrument/asset reaches a certain price. A stop-loss aims to cap an investor’s losses on a position. If you set a stop-loss order for 10% below the buy price, it will limit your losses to 10%.
A stop-loss aims to cap your losses by closing you out of the trade once your pre-determined figure has been reached. The stop-loss order you’ve set will stay in effect either until it’s triggered, cancelled or your position is liquidated. If the instrument’s price falls below your threshold, your stake in the instrument will be sold at the next available market price. By occurring automatically once your limit is reached, it provides an exit plan, preventing you from losing any further capital on that position.
The stop-loss level is determined by the trader, who might take into account fundamental analysis factors like current underlying market conditions and the likelihood of slippage occurring. Slippage in tradingis the difference between the expected price and the actual price the trade was executed at. This can occur at periods of high market volatility, such as major news releases and events, when either entering or exiting the trade.
The stop-loss order lasts until either a) the stop-loss level is reached, b) the stop-loss is removed without closing the trade, or c) the trade is closed.
Types of stop-loss orders
- Buy and sell stop-losses
- Trailing stop-loss
- Guaranteed stop-loss
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What is a buy stop-loss order?
If you’re opening a short position, you would use a ‘buy’ stop-loss order, as the instrument is being sold with the expectation the price will go down.
What is a sell stop-loss order?
If you’re in a long position, meaning the instrument (such as a specific currency pair, share or commodity) is being bought with the expectation that it will increase in value, you would implement a sell stop-order. The trader, therefore, benefits when the market price rises. The stop-loss order would be set up below the current market price.
Trailing stop-loss
A trailing stop-loss order, unlike a regular stop-loss, will follow, or ‘trail’, the price of a trade as it fluctuates. The trailing stop is set a percentage, or a specific number of points, away from the current market price, which accommodates for the fluctuation in the asset’s value, as the stop-loss adjusts.
For example, on a buy trade, the trailing stop will rise as the price of the asset rises, staying a pre-set distance away. If the market then begins to fall, the trailing stop remains at its new higher level. These stops aim to lock in profit by moving in the direction of a winning trade, while ensuring a cap is in place, in case the trade doesn’t go in your favour.
Likewise to a regular stop-loss order, a trailing stop does not guarantee that you’ll exit the position on the price you set. If the market gaps or you experience slippage above or below your set stop-loss, your position will be closed at the next available price.
Guaranteed stop-loss order
If you want complete certainty that a trade will close out at the exact price you set your stop, without running the risk of slippage, you can pay a premium for a guaranteed stop-loss order. The premium is based on the current market price, and if the GSLO is not triggered, it’s refunded in full.
This is a robust risk management tool if you’re concerned about the market volatility or gapping, but can be cancelled or switched to a regular stop-loss order, or trailing stop, at any time.
Where to set a stop-loss
When deciding where to set a stop-loss, traders might account for fluctuation or volatility in the market. The historical movement of the asset and its financial market is also a good indication of where to set your stop-loss. If you’re intending to go long, the stop-loss should be placed below the market price, or it should be placed above the market price if going short.
Where to place your stop-loss can also depend on what type of trader you are. A longer-term investor may choose a higher percentage distance away, whereas an active trader may choose a smaller distance.
Stop-loss trading strategy
Stop-loss orders can be used for a wide range of trades, in volatile markets such as shares and forex trading. This is because there is more chance of slippage in a highly liquid market, and traders can take advantage of stop-loss limits. Traders can use risky short-term strategies, such as scalping, day trading and swing trading effectively by placing stop-loss orders at their desired points of exit. Learn more about trading strategies in the video below that can be used in conjunction with stop-loss market orders.
Stop-loss calculator
When deciding where to place your stop-loss, it’s important to consider how much you’re willing to lose. Consequently, a stop-loss should be placed far enough away so that it won’t be triggered too early, but not so far away that there is a risk of losing significant capital. A trading plan should be developed so you can enter and exit strategically.
How to set a stop-loss
You can set stop-loss orders on all of your positions with our award-winning trading platform, Next Generation. We offer endless drawing tools, price projection tools, technical indicators, stop-loss, take profit and other market orders.
- Register for a live account and choose your product between spread betting and CFDs. Alternatively, you can practise risk-free with virtual funds on our demo account.
- Choose an asset from the product library and open a live trading chart.
- From the drop-down menu beside the asset name, select 'Order Settings'.
- Here, you are able to customise stop-loss, take-profit, limit and stop entry orders. You can set default measures in the form of a percentage, price amount in GBP, or points.
- You can also choose how long the stop-loss order stays before expiry, from anything after 1 day to open ended. Learn more about trading on different chart timeframes.
Spread betting stop-loss
When trading the financial markets with us, you can speculate on the price movements of the underlying asset through spread betting or CFD trading (contracts for difference). Spread betting is our most popular product and allows you to trade tax-free* in the UK. Here is an example of how to use a spread betting stop loss on an existing position.
Let’s say you open a trade of £1 per point at a ‘buy’ price of 7310, placing a stop-loss at 7300. If the price falls to 7300, the stop-loss will be triggered and your trade would be closed at the next available price.
However, even if the price were to reach 7350, it could potentially fall to 7300 and trigger your stop-loss. One way to guard against such a scenario is to implement a trailing stop-loss order.
The importance of a stop-loss
Stop-loss orders are essential to your trading strategy. Some of the benefits of implementing a stop-loss to your trades are:
- They are useful if you cannot monitor the market for extended periods of time.
- They can help manage losses (particularly important when trading on leverage).
- There is no cost to attach one.
- It prevents loss aversion by automatically exiting, rather than holding on to losing trades.
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It's evident that stop-loss orders are critical in trading strategies, serving as a risk management tool by automatically closing positions when the market moves unfavorably. These orders help mitigate losses and are adaptable based on market conditions, trader preferences, and asset volatility. Here's a breakdown of the concepts covered:
Stop-Loss Order
A stop-loss order is a market order that closes a position once an asset reaches a specified price. It caps losses by automatically exiting the trade when a predetermined threshold is hit.
- Purpose: To limit losses, providing an exit plan to prevent further capital loss.
- Determinants: Set by traders considering market conditions, fundamental analysis, and slippage likelihood (the difference between expected and actual trade execution prices).
Types of Stop-Loss Orders
- Buy and Sell Stop-Losses: Used based on whether the trader expects the market price to rise (sell stop-loss) or fall (buy stop-loss).
- Trailing Stop-Loss: Adjusts as the trade fluctuates, locking in profits while capping losses by trailing a set distance or percentage away from the current market price.
- Guaranteed Stop-Loss Order (GSLO): Ensures the trade closes at the specified price without slippage but comes with a premium cost.
Setting Stop-Loss
- Placement: Depends on market volatility, historical asset movement, and trader type (long-term vs. active).
- Strategy: Integral to various trading approaches like scalping, day trading, and swing trading, offering an exit point.
Implementation
- Stop-Loss Calculator: Essential to determine an acceptable loss level.
- How to Set a Stop-Loss: Utilize trading platforms offering features like drawing tools, technical indicators, and customizable order settings.
Spread Betting Stop-Loss
- Spread Betting: Allows tax-free trading in the UK, wherein stop-losses are crucial to manage risk associated with speculative price movements.
Advantages of Stop-Loss Orders
- Essential in Trading: Benefits include managing losses, aiding time-constrained traders, and preventing loss aversion.
Platform Features
- Next Generation Trading Platform: Offers diverse tools like drawing tools, order settings, and chart timeframes for effective stop-loss implementation.
Importance of Stop-Loss
- Risk Management: Crucial for managing losses, especially in leveraged trading scenarios.
Trading Advantages
- Powerful Trading on the Go: Platforms facilitating seamless trade execution, progress tracking, and alerts for informed decision-making.
Each element contributes to a comprehensive understanding of stop-loss orders and their significance in mitigating risks associated with trading across various market conditions and strategies.
