Stop loss orders 

Last Updated on February 24, 2021 by Alphaex Capital

 

Stop Loss Order

Risk Management is one of the key components to trading successfully. Trading is as much of a defensive art of protecting your capital as it is making a profit.

There is no shame in losing.

In order to success, you must be willing to cut your losses and let your winners run.

This is where stop loss orders will come in to play to make your life easier!

Stop Loss Orders: Cutting Your Losses

What do we mean by cutting your losses?

We don’t mean as soon as the trade goes against you to cut it.

To keep things simple:

let’s discuss position trading. Position trading in terms of risk is allotting how much you should risk of your total account.

Let’s be realistic and say we have £100,000 in our trading portfolio the best practice is to issue a trade position that is 2% maximum of the portfolio; in this case, it is £2,000 in the margin.

The beauty here is that this rule automatically keeps risk at 2% of the portfolio. Kind of an inbuilt Kelly’s Criterion.

If your portfolio grows to £110,000 then 2% of this is £2,200.

If your portfolio falls to £90,000 then 2% of this is £1,800.

Can you see that the portfolio maintains a 2% risk management at all portfolio levels. 2% is not a standard measure, you can use 1%, 0.5%, 3% etc. Whatever you are happy to risk.

From that position size, we need to tailor our own risk against any potential bad trades so a rule of thumb is usually 10%. To put it simply:

Portfolio: £100,000.

2% Position risk per trade: £2,000

10% Risk of position: £200.

So overall, we are really risking only 0.2% per trade.

Here is a brief example of how managing your risk with stop loss orders works to limit your losses:
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Please note: The above does not take into consideration any fees, commissions or charges during trading.

As you can see, it’s taken 25 straight losses in a row to lose 4.69% of the initial portfolio balance.

You are not going to get 100% of your trades correct. If your mentality is that you are looking for a solution and guarantee profit every time, that needs to stop here.

As you can imagine, by sticking to your risk management will protect your underperforming days whilst enhancing your profitable trades through a trailing stop loss.

How To Place A Stop Loss Order:

When you place a trade your order ticket will have an option to insert a stop loss.

This can be the price of the asset, a percentage value, or a monetary value – all of these indicate how much you are willing to risk.

These orders can be amended in real-time, so you don’t have to worry if you make a mistake immediately.

You can also add a stop loss to an open trade, most platforms it’s a simple click away.

These types of orders are essential and fundamental to your trading platforms – so they won’t be hard to find.

You are learning to be in the game of risk management, it is this form of management that will make you more money.

Stick with the rules of your risk management and overtime your edge will be defined.

By limiting your losses systematically and letting your winners ride – over time you will profit.

Do you see why risk management is so important?

You now know what your risk is before you even enter a trade. It is very important to know your maximum loss.

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