Methods of Setting Stop Loss Stock Orders In Stocks
Traders using a stock system must have mathematical calculations that reveal where to set stop loss & take profit in stocks trading trading.
A trader can also place set stop loss and take profit orders according to the stocks indicators used to set these set stop loss and take profit orders. Certain stocks indicators use mathematical equations to calculate where the set stop loss and take profit order should be set so as to provide an optimal exit point for stock trades. These stocks technical indicators can be used as the basis for setting these set stop loss and take profit orders.
Other traders also place these set stop loss and take profit orders according to a pre determined risk : reward ratio specified in their stocks strategy. This method of setting stop loss and take profit is dependent upon certain mathematical equations. For example a ratio of 20 pips stocks stop loss can be used by a trader if the trade has the potential to make 60 pips in profit: this is a risk: reward ratio of 3:1
Other traders just use a predetermined risk percentage calculation of their total stocks account balance.
To set stop loss & take profit in stocks it is best to use one of the following methods:
1. Percent of Stock Account Balance
This method is based on the percentage of stocks account balance that the trader is willing to risk & the risk : reward ratio.
If a trader is willing to risk 2% of account balance then the trader decides how far he will set the stop loss order level based on the position size that he has bought or sold - the trader also use the risk reward ratio to calculate where to set take profit order for this trade.
Example:
If a trader has a $10,000 account and is willing to risk 2 %
- If the trader buys 1 contract
1 pip = $10
Then setting risk at 2 %
2% is $200
Stop-loss = $200
If Stop Loss Stocks Order = $200 then using risk:reward 3:1 the take profit will be set at $600
2. Setting Stop Loss Stocks Order using Support & Resistance Areas
Another method to set stop loss & take profit in stocks is to use supports and resistance levels, on the stocks charts.
Given that stop loss orders and take profit orders tend to congregate at key points, when one of these levels is touched by the stocks price, others are set off, like dominos. Stop loss orders and take profit orders tend to accumulate just above or below the resistance or support levels, respectively. Traders should use these levels to set stop loss and take profit in stocks depending on which side of the trade they are in.
A resistance or a support area should act like a barrier for stocks price movement, this is why these resistance and support levels are used to set stop losses and take profits, if this stocks price barrier is broken the stocks price movement can go towards the opposite direction of the original stocks trade, but if this barriers (support & resistance levels) are not broken the stocks price will continue moving in the intended direction. This means that these support and resistance levels can be used as good points to set stop loss and take profit in stocks.
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