Let's see some Stop Orders... Initial Stop (to cut losses) Once you have detected a potentially profitable entry signal you will have to determine a level at which your setup is not valid anymore. Since you never know 100 % what will happen next you have to protect your capital with every trade. As soon as you place your trade you should therefore also define the so called “initial stop”. This is the level at which your position will get closed automatically when you are wrong. This is your maximum risk for that position. This stop should not be changed when prices approach that level. The initial stop can be defined in different ways. You can set that stop according to a specific dollar amount you want to risk. You can risk a fixed pip stop, e.g. 20 pips per trade or you can use a volatility based stop using the ATR indicator. You can also place the initial stop below or above a specific level in the chart which you consider to be support or resistance (technical stop). Securing Profits (Trailing stop) Let’s say your position performs well and is heading in the anticipated direction. You will now have to manage your trade and adjust the stop. Nothing is more annoying than a trade which shows you a nice profit but still gets stopped out with a loss later on. An important part of trading is managing your position – in this case adjusting your initial stop. You can adjust your stop manually once it shows you a healthy profit or use a so called “trailing stop“. When you apply a trailing stop your loss protection will be automatically adjusted. The parameters for a trailing stop are the “distance” (from the current price to your stop) and the “step”. If you choose a 30 pips distance trailing stop with a “10 pips” step the trailing stop will be moved automatically to 30 pips above or below current prices (depending on if you are long or short) every 10 pips. Logging in profits (Profit target stop) This type of stop is used when a specific pre-defined price target was reached. The profit target stop is especially useful in trading on a short time frame and in a range bound market. If you bought a currency at the lower boundary of the range you would then place a profit target at the upper end of the range if you are of the opinion that the range will stay intact. Once that level is reached the position will be squared automatically. Stop entry A stop order can also be used as an entry into a new position. This can be especially useful if you expect a significant move once a certain level is taken out. Let’s assume you are bullish on EUR/USD and want to go long once a certain resistance level is surpassed. In this case you would place a buy stop order above that resistance level and get “stopped in” once that level is reached. Stop orders are an extremely useful tool if applied correctly.
Great post. Stop loss orders is one of the only true safety net for traders. Stop orders help keep the trader safe from unwanted losses. This is great information to share. Kudos.
The only other variation I can think of is a partial stop loss. You can exit a portion of your trade to lock in profit and let the rest run with the trend. One way of achieving this is to set a profit target stop for half your order and then a trailing stop for the remainder. So, its not really a different type of stop, more like a combination of the two.
Dang, this is a long and dedicated post. I completely agree with your initial stop; I feel that I do that myself a ton. This is really informative, and I recommend everyone to read this.
