Why do I need a stop loss and how to set it?📈
❗️A stop loss is a limit order that protects you from further losses when the price moves against your position.
Correctly used stop loss:
🟢Allows you not to lose the entire deposit in one transaction.
🟢Liquidates losses and frees margin for new transactions.
🟢Minimizes possible losses.
✅Trading with a stop loss limits your losses and saves your trading deposit from a sudden price movement that is not in your favor. You can perceive a stop loss as a kind of insurance. You have to constantly pay small premiums, but insurance will protect you from large monetary losses in case of sudden market movements against your position.
✅The rules for setting a stop loss are often misunderstood in conventional retail. However, it should be clear that you can never enter a trade without a stop loss. Not only because you risk losing too much on one trade, but you also easily fall victim to emotional trading mistakes.
✅When you know where your stop loss is (and why you are placing it there), you will feel less tempted to break your stop loss rules and are more likely to stick to your original plan.
🟡What are the ways of setting stops?
There are three ways to set stop losses that can be used in trading:
1️⃣Volatility based stop loss.
2️⃣Time based stop loss.
3️⃣Structure based stop loss.
1️⃣Volatility based stop loss.
The volatility stop loss takes into account the current price volatility in the market. The indicator that measures volatility is the average true range or the ATR indicator.
You need to determine the current ATR value and multiply it by the coefficient of your choice.
2️⃣Time based stop loss
The time stop determines when to exit the trade depending on the time that has passed since the start of the position opening. Instead of exiting the market depending on the value of the price, you exit after a certain amount of time has passed.
3️⃣Structure based stop loss.
The structural stop loss takes into account the current state of the market relative to the levels. For example, the price usually reverses from the support level and goes up. Therefore, the stop loss can be placed under the support level.
In this method, you know exactly when you will be wrong if the market structure is broken. On the other hand, if the levels are far apart, you will need a fairly large stop loss. Therefore, you will have to reduce the position size in order to maintain the current level of risk.
⚠️Stop losses should not be used in situations where the reasons for the transaction are exclusively fundamental. The price should have the opportunity to "take a walk" before the idea is implemented. Risk management is carried out by selecting the optimal share of the portfolio allocated to the transaction. Often, stop-losses are not used in long-term portfolio investment based on an unambiguous fundamental approach.
❗️Stop losses should be used in transactions where there are clear technical grounds for its placement. In such strategies, many adhere to the tactic that the potential profit exceeds the possible loss in a ratio of at least 2 to 1 or 3 to 1 (this is individual). Stop-losses are necessary for speculative trades with large "shoulders" and/or trades with a small movement potential, where the filigree execution of entry and exit is important.
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