Trade Forex Trading

What's a StopLoss? and What to Consider When Setting

A stop loss order limits damage after you enter a trade if prices turn against you.

This represents a predetermined exit threshold for any position incurring a loss, serving the purpose of restricting downside exposure.

A stop loss order constitutes an instruction given to your broker to automatically liquidate your trade position should it reach a designated price level. Once this set price is hit, your open trade is closed out.

These orders limit your losses. They close a trade if price hits a bad level.

Always use these orders, no matter what others say. Set them every time.

Placing stop losses in Gold trading trips up many folks. Set it too near your entry, and noise might kick you out early. Set it too wide, and a wrong bet turns a minor loss into a major hit.

Some traders note downsides to these orders. They lock in sales at low prices if the market turns against your position, instead of waiting for gains.

Those who doubt it will also say that when you set stop-loss orders, you might exit a trade right before the market moves in the direction you want. Many investors have set these orders and then seen the price go back to that level, or just below it, and then move as they thought it would. A trade that could have made money now loses money instead.

Seasoned traders consistently implement stop loss orders, as they are an essential component of the discipline necessary for success, enabling the limitation of minor losses from escalating into significant ones. Furthermore, by intentionally placing these orders at the moment of entering a trade position, you are making this critical decision when you are most impartial regarding the actual market conditions, since the most objective analyses occur before initiating a trade. Once the market is open, a trader's analysis may shift, as they develop a bias towards a specific direction based on their trading strategy.

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

A key question is exactly where to place and set this order. In other words, how far should you place and set this below your purchase trading price? Many traders will tell you to set pre-determined - max acceptable loss, an amount that is based on your equity balance rather than use of indicators of the xauusd in question.

Experts say that you shouldn't lose more than 2 percent of your account balance on any single gold trade. If you have $50,000, that means you shouldn't risk more than $1,000 on any one trade.

If you purchased one regular-sized chunk of something, then your possible loss would be $1,000 or less. If so, you'd set your stop order at 100 pips (points), and you'd have $49,000 remaining in your account if you closed the trade after the biggest loss allowed. The idea of handling risk is big, and it falls under the umbrella of managing money.

What to Consider When Setting

The most crucial issue is whether this order should be placed close to or far from the price at which you initiated and opened the position. Several variables will determine where you set:

No fixed rules exist for placing support and resistance levels on charts. We stick to basic guidelines to set them right.

Some of general guidelines used are:

1. Risk - How much money are you okay with losing on one trade? A good rule is that a gold trader shouldn't lose more than 2 percent of all the money in their account on any single trade.

2. Volatility - this is about how much the xauusd's price moves each day. If the price often goes up and down by 100 pips or more during the day, you can't set a very small stop loss order. If you do, the market's normal ups and downs will cause you to exit the trade.

3. Risk Reward ratio - this is the measure and estimate of the potential risk to reward. If the market conditions are favorable then it is possible to comfortably give your trade more room. However, if the market is too choppy it then becomes very risky to execute a trade transaction without a tight stop then don't make the trade transaction at all. The risk to reward is not in your favor & even placing tight stop loss orders won't guarantee profitable results. It would be more wiser to look for a much better trade next time.

4. Position size - if you open a position that is too large, even a tiny price change will be a large percentage. This means you need to set a very tight stop loss, which could be triggered more easily. It is often better to make smaller trades, allowing the trade more room to move, by setting a sensible level for the order while also limiting risk.

5. Account Capital - If your trading account is under-capitalized then you'll not be able to set your stops accordingly, since you will have a big/large amount of money in a single trade transaction which will constrain you to set very tight stops. 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 may & might not be necessary. If on the other hand price is choppy and has no clear market trend direction then you should set a tight stoploss order or not execute any transactions at all.

7. Timeframe - the bigger the chart timeframe you use, the bigger and larger the stop should be. If you were a scalping your stops would be much narrower than if you were a day or a swing trader. This is because if you are using longer chart time-frames & you determine price will be move up it does not make sense to put a very close stop loss because if the price swings just a little, your trade order will be hit.

The method you pick will mostly be based on the kind of buyer you are. The most used way to figure out where to set is resistance and support areas. These spots are good for setting orders because they are reliable, since the support and resistance areas will not be reached often.

The steps for setting the stop loss orders you pick should also follow the guidelines above, or at least the ones that fit your gold strategy.

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