Stops are very important if not the most important part of a trader's tool set.
There a few different types of stops and a simple search engine check will reveal many different ways of placing stops, which can be confusing to any new trader.
What is generally lacking with a lot of this information is the actual ideology behind the stops & indeed, confuses many people when they hear conflicting views on stops.
For example, some methods encourage the use of a 15pip stop loss behind the last support/ resistance area whereas other strategies recommend risking only 1% of your bank per trade.
Again, many of the home based strategies will suggest 15pip stop loss which is cast in stone.
So who is right? Well, they are all correct.
Placing stops is a matter of personal choice & mainly depends on your trading personality of which we are all different.
Some prefer to be cautious, other more experienced so therefore confident.
Whatever your view on stops it is important to know there is no wrong answer to this.
If a market is good & your system is strong enough your stops should not be taken out.
The opposite is also true, if the market is "choppy" or continually changing direction you will not want to be involved anyhow so stops will give you the nudge you need.
So, what are the types of stops? There are lots of different stop methods & here are the five most common ones; 1.
Percentage Stop 2.
Money Stop 3.
Technical Stop 4.
Buy Stop 5.
Sell Stop I am going to discard the last two as these are for more experienced users of "set & forget" systems which I will enlighten you with another time.
I will explain the first three & this hopefully will give you a broader understanding of these stops; 1.
Percentage Stop Assuming you had a trading account of £1000 then you would only want to risk 1% on any one trade.
This form of stop is more common with traders trading in individual shares or traders with very large trading accounts.
For instance, if you had £100,000 you would only place a trade of £1000.
A bit impractical for our type of trading as most new traders start with a trading account of £200.
Hedge Funds would also trade with this type of stop to prevent overexposure.
2.
Money Stop Not too different to a percentage stop but is calculate d on the amount of money you are prepared to risk on your trade.
This can be implemented for our style of trading.
So, if you had a starting account of £200 but only wanted to risk £30 per trade then you could place a £2 stake with a 15pip stop loss.
Again, very easy to implement for our style of trading but also used by traders holding positions for several days, even weeks.
3.
Technical Stop A technical stop is placed at a certain level behind a critical support/ resistance level.
The great thing about a technical stop is that this level is often used by other traders.
This can also be a bad thing if the floor traders decide to have a little fun at our expense & swing the market back & forth to take out the stops either side.
This is very common at any market opening.
Remember how the market conforms to the support/ resistance levels? This is also true of stops.
The key question here is, where have all the traders placed their stops - is it 15, 20 or 25 pips behind the appropriate level? You can usually work this out by measuring how far a candle penetrates a level before retracing.
This is likely to be between 15- 20 pips for the FTSE but is probably around 25-30pips on the S&P500.
Technical stops are very common in Forex trading with stops being placed up to 60pips behind the critical areas but these are different markets to what we trade in.
If you trade pivot to pivot then the use of technical stops will greatly enhance your trading success but as always, ensure you back test & double check anything your told to check it is correct for your style of trading.
Happy Trading!