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What is a XAUUSD Trading StopLoss? And Factors to Consider When Setting Loss Orders

StopLoss is a type of XAUUSD order placed after opening a Gold trade that is meant to cut losses if the market moves against you.It is a predetermined point of exiting a losing transaction & it is meant to control losses in trading.

A stop loss is an order placed with your online broker that will mechanically close out your trade transaction when the Gold price gets to a predetermined price. When the particular level is attained, your open trade transaction is liquidated so as to cut your trading losses.

These stop loss orders are designed to limit the amount of money that a trader can lose: by exiting the transaction if a particular price that is against the Gold trade is reached and attained.

For illustration, one might buy Gold at 1200.50, and place a stop loss at 1200.00. If the Gold price moves against you and reaches 1200.00, the stop loss will be filled & the trade position will be closed out therefore limiting the loss to only 50 pips (points).

Regardless of what you might be told by other traders, there's no question about it that whether these orders should or should not be used - they should always be used.

One of the most difficult things in Gold metal trading is setting these stoploss orders. Put the stop loss order too close to your entry price and you are liable to exit the Gold trade because of random price volatility. Place it too far away and if you're on the wrong side of the market trend, then a small loss could turn in to a large one.

Critics will point out several disadvantages of these orders; that by placing them you are guaranteeing that should your open trade position move in the wrong market direction, you'll end up selling at lower prices, not higher.

The skeptics will also argue that in setting and placing stops you're susceptible to exit a trade just before the market heads in your favor. Most investors have had the experience of setting these orders and then seeing the price retrace to that level, or just below it, and then go in the direction of their original and initial market trend analysis. What may have been a profitable trade instead turns in to a loss.

Experienced traders always use stop losses as they are an important part of the discipline that's required to succeed because they can limit and prevent a small loss from becoming a big one. What's more, by diligently setting these stoploss orders whenever you enter a trade position, you end up making this important decision at the point in time when you're most objective about what is really happening with the Gold market, this is because most objective trading analysis is made prior to opening a trade. After entering market an investor tends to analyze & interpret the market differently because now they have a bias towards one side, the direction of their analysis.

Unexpected news can come out of the blue and dramatically affect the Gold price: this is why it's so important to have a stop loss order. Its best to cut losses early when a trade position is going against you, it is best to cut your trading losses immediately instead of waiting for it to become a large one. Again, if you set your stops when you are entering a trade, then that is when you are most objective.

A key question is precisely where to place this order. In other words, how far should you as a trader set this below your purchase price? Many traders will tell you to set a pre determined - maximum acceptable loss, an amount depending on your account equity balance rather than use indicators of the Gold pair in question.

Professional money managers advice that you should not lose more than 2% of your equity on 1 single Gold trade transaction. If you've got $50,000 dollars in capital, then that would mean the maximum loss you should set for any one single transaction is $1,000.

If you bought 10 standard lots of a XAUUSD pair, then you would limit your risk to no more than $1,000. In that case you would set your stop loss at 100 pips (points) & would have $49,000 dollars left if you exited the position at the maximum loss allowed. The topic of equity management & risk management is wide & it is covered & discussed/explained under money management topics.

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What to Consider When Setting StopLoss Orders

The most important question is how close or how far this order should be from the price where you opened the position. Where you set will depend on several factors:

Since there are no rules set in stone as to where you should set these stop loss order levels on a Gold price chart, we follow general guidelines used to help place these stop loss order orders correctly.

Some of the general rules used are:1. Risk - How much is one willing to lose on a single trade position? The general rule is that a gold trader should never lose more than 2 percent of the total equity on any 1 single Gold transaction.

2. Volatility - this refers to the daily price range of XAUSUD pair. If the XAUUSD pair routinely moves up & down in a range of 100 pips or more over the course of the day, then you can't set a tight stoploss order. If you do, you'll be taken out of your position by the normal market price volatility.

3. Risk to Reward ratio - this is the estimate of potential risk:reward. If the market factors and conditions are favorable then it's possible to comfortably give your position more room. However, if the market is too range bound it then becomes very risky to open a trade position without a tight stop, then do not make the Gold trade at all. The risk:reward isn't in your favor and even setting tight stop losses won't guarantee profitable results. It would be more wise to search for a better trade position to trade the next time.

4. Position size - if the position size opened is too large then even the smallest decimal price point move will be fairly large in % terms. This means that you have to set a tight stop which may be taken out more easily. In most cases it's better to adjust to a smaller position size so as to give your Gold trade more room for oscillating, by setting a sensible level for this stop loss order & the same time decreasing the risk.

5. Account Capital - If your account is under-capitalized then you will not be able to place/set your stop loss orders accordingly, because you'll have a large amount of money on a single position that will force you to set tight stop losses. If this is the case, you should think seriously about if you have enough capital to trade XAUUSD in the first place.

6. Market conditions - If the price is trending upwards, a tight stop loss may not be necessary. If on the other hand the price is choppy and there is no clear direction then you should set a tight stop loss or not open any positions at all.

7. Time-frame - the larger the chart time frame you use to trade XAUUSD, the larger the stoploss order set should be. If you were a scalper your stop losses would be narrower than if you were a day trader or a swing trader. This is because if you are using longer chart time frames to trade and you determine the price will be heading up it doesn't make sense to place a very tight stop loss because if the Gold price swings a little your stop loss order will be hit.

The method of setting stop losses that you choose will greatly depend on what type of XAUUSD trader you are. The most often used method to identify where to set stop losses is - resistance & support levels. These levels give good points for setting these stop loss order orders as they're the most reliable, because the support & resistance zones will not be tested many times.

The method of how to set these stops that you select should also follow the guide-lines above, even if not all those that apply to your Gold trade strategy.

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