Summing Up: Setting Stops

Summary: Proper Stop-Loss Placement

Here are the key takeaways for setting stop-losses:

1. Choose the Right Broker
   Select a broker that allows you to trade position sizes appropriate for your capital and risk management rules. This will help you avoid unnecessary risks associated with excessively large positions.

2. Plan Your Exit Before Opening a Trade
   Always determine your exit point before entering a trade. If the market changes direction quickly, you might lose control and miss the optimal exit point, which could negatively affect your account.

3. Set Stop-Losses According to Market Conditions
   Your stop-losses should be based on market conditions, capital, and your chosen trading strategy. The size of your stop should not be determined by how much you’re willing to lose — the market doesn’t care about your capital and won’t consider your preferences. Find stop levels that indicate when the trade is going wrong, and adjust your position size accordingly.

4. Use Limit Orders to Close Trades
   Always use limit orders for automatically closing trades. Manual stop-losses are for experienced traders, but even they should prefer limit orders. These orders work without your intervention, triggering automatically even if you’re away from your terminal.

5. Only Move Stop-Losses Towards Profit
   Use trailing stops to move your stop as the position grows in your favor. However, never increase your stop size when the market goes against you. Expanding your stop is a sign of avoiding responsibility for risks and can lead to significant losses.

It’s important to understand that setting stop-losses is both a science and an art

 

Markets are volatile, and what works today might not be suitable tomorrow. However, with continuous practice of placing stop-losses correctly, recording your trading decisions, and analyzing results, you’ll greatly improve your ability to manage risks and become a more professional trader.