stop loss order definition
A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit) or a limit order (fixed or pre-determined price).
With a stop order, the trader does not have to actively monitor how a stock is performing. However because the order is triggered automatically when the stop price is reached, the stop price could be activated by a short-term fluctuation in a security's price. Once the stop price is reached, the stop order becomes a market order or a limit order.
In a fast-moving volatile market, the price at which the trade is executed may be much different from the stop price in the case of a market order. Alternatively in the case of a limit order the trade may or may not get executed at all. This happens when there are no buyers or sellers available at the limit price.
There is such a useful tool as trailing stop loss order, yet many fail to use it. Using a trailing stop allows you to let profits run while cutting losses at the same time. There are different methods of placing trailing stops,
which based on
Trailing Stop Percent,
Trailing Stop Price and
Setting Trailing Stop using Support.It`s quite difficult to define best
method, so we hope, you will fins some useful information in article how to use trailing stop loss
Here is the trailing stop loss formulas for a simple
Trailing stop loss indicator
The formula draws a stoploss loss line which will be 7% below the highest close within a lookback period of 20 bars.
The Stoploss % and the Lookback period can be varied. When you plot the indicator you will be prompted for Look back period and Stoploss%. The defaults are set to 20 bars and 7%.
LB:= Input("Enter lookback period",15,30,20);
PERIOD:= Input("ENTER % STOPLOSS",2,10,7);
HHV(C ,LB)-(HHV(C,LB)*(PERIOD/100))
Trailing stop limit vs trailing stop loss
A trailing stop limit order is designed to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain. A SELL trailing stop limit moves with the market price, and continually recalculates the stop trigger price at a fixed amount below the market price, based on the user-defined "trailing" amount. The limit order price is also continually recalculated based on the limit offset. As the market price rises, both the stop price and the limit price rise by the trail amount and limit offset respectively, but if the stock price falls, the stop price remains unchanged, and when the stop price is hit a limit order is submitted at the last calculated limit price. A "Buy" trailing stop limit order is the mirror image of a sell trailing stop limit, and is generally used in falling markets.
What Is Stop-Loss Hunting?
Basically, stop-loss hunting is a trading strategy that tries to force retail traders (like you and me) out of our positions by driving the market price to a level where our stop-loss levels are placed. This is a strategy that the investment banks and hedge fund managers adopt because they have the resources to do it.
Simply put, the big financial institutions buy (or sell) a large amount of currency that causes the market price to go up (or down), hitting the retail traders' stop-loss levels, and causing us to exit the market at a loss. In the meantime, they will gain from our losses.
One of the secrets to trading forex successfully is to strictly follow an effective money management strategy. For many forex traders that means using stop losses. Unfortunately, those very same stop losses are often responsible for the failure of most day traders, especially when stop losses are tightly set. There is nothing more frustrating than having a stop loss close a trade that would have gone on to be profitable.
Trading with No Stop Loss in forex - Profit Protection Strategies
Stop losses don’t only exist to prevent losses but can also be used to protect profits; a good example of this is a trailing stop-loss. A Forex Trading - No Stop Losstrailing stop can be used to protect profits that are already on the table, this is best done when the trade has made substantial gains, and then a trailing stop can be put between the entry point and the current price action. This allows for the current price movement to continue, just in case the market will give more profits, while at the same time ensuring that the trade in question won't lose money for the trader. A ‘limit order’ can also be used to exit parts of a trade when a pullback is expected but the market has not yet hit the profit targets.
In order to avoid making large losses, many traders use tight stop-losses but this often results in multiple small losses that can quickly add up and ruin a trading account. Often, trades that start out badly eventually become profitable, if the trade is just given some time.
Simple Stop Loss Strategies can be easily used with Japanese Candlestick trading.
One of the most often-asked questions we receive at the Candlestick Trading Forum is how to use candlestick analysis as part of a simple stop loss strategy.
The fact is, not only is candlestick analysis ideal for pinpointing the exact time the successful trader or investor should enter the trade, but it is equally valuable in stop loss strategies. The proper use of candlestick analysis provides a simple, visual representation of the exact point in time when the reason for buying or shorting no longer exists.
Once you deeply, truly understand candlestick trading tactics, you will soon come to the realization that most of trading is just plain common sense. But, as I believe Mark Twain said, “Common sense is not that common”.
How does a stop-loss order work
A stop-loss order, or stop order, is a type of advanced trade order that can be placed with most brokerage houses. The order specifies that an investor wants to execute a trade for a given stock, but only if a specified price level is reached during trading. This differs from a conventional market order, in which the investor simply specifies that he or she wishes to trade a given number of shares of a stock at the current market-clearing price. Thus, a stop-loss order is essentially an automatic trade order given by an investor to his or her brokerage. It will only become active and be executed once the price of the stock in question falls to the specified stop price stated in the investor's stop-loss order.
Types of Stop Loss order
1) Stop Loss Limit Order
A stop loss limit order is an order to buy a security at no more (or sell at no less) than a specified limit price. This gives the trader some control over the price at which the trade is executed, but may prevent the order from being executed.
A stop loss buy limit order can only be executed by the exchange at the limit price or lower. For example, if an trader is short and wants to protect his short position but doesn't want to pay more than Rs.100 for the stock, the investor can place a stop loss buy limit order to buy the stock at any price up to Rs.100. By entering a limit order rather than a market order, the investor will not be caught buying the stock at Rs.110 if the price rises sharply.
Alternatively a stop loss sell limit order can only be executed at the limit price or higher.
Advantages and disadvantages of the stop loss limit order
The main advantage of a stop loss limit order is that the trader has total control over the price at which the order is executed. The main disadvantage of the stop loss limit order is that in a fast moving volatile market your stop loss order may not get executed if there are no buyers/sellers at the limit price.
2) Stop Loss Market Order
A stop loss market order is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit). In other words a stop loss market order is a order to buy or sell a security at the current market price prevailing at the time the stop order is triggered. This type of stop loss order gives the trader no control over the price at which the trade will be executed.
A sell stop market order is a order to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price. For example, if an trader holds a stock currently valued at Rs.100 and is worried that the value may drop, he/she can place a sell stop order at Rs.90. If the share price drops to Rs.90, the exchange will sell the order at the next available price. This can limit the traders losses (if the stop price is at or below the purchase price) or lock in some of the profits.
A buy stop market order is typically used to limit a loss (or to protect an existing profit) on a short sale. A buy stop price is always above the current market price. For example, if an trader sells a stock short hoping the stock price goes down in order to book profits at a lower price, the trader may use a buy stop order to protect himself against losses if the price goes too high.
Advantages and disadvantages of the stop loss market order
The main advantage of a stop loss market order is that the stop loss order will always get executed. The main disadvantage of the stop loss market is that the trader has no control over the price at which the transaction is executed.
Conclusion
Stop loss orders are great insurance policies that cost you nothing and can save you a fortune. Unless you plan to hold a stock forever, you should consider using them to protect yourself.
What Does Limit Order Mean?
An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.
Depending on the direction of the position, limit orders are sometimes referred to more specifically as a buy limit order, or a sell limit order.
Buy Limit Order
sell stop limit order
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