Trade Stock Indices

Stop Loss Trading Summary: Points and Factors To Remember When Placing

For indices stop orders, avoid tight spots. Place them away from support or resistance lines.

A few pips below the support or above the resistance areas is the best place.

When intending to enter a long position (purchase an asset), one should identify a proximate support level situated beneath the intended entry point and position the stop order approximately 10 to 20 pips below that support marker. The subsequent illustration clearly details the placement where a trader can set their protective stop orders just beneath the support benchmark on a stock chart.

Support Level for Placing Stop Loss Order Level for Buy Trade

Support Level for Putting Stop Loss Order Level for Buy Trade

If you are selling a financial instrument, find a nearby price level where the price has had trouble going higher, that is above where you started your trade, and put your stop loss about 10 to 20 pips above that level. The example given below shows where a trader can put their stop loss orders just above the price level on a stock chart.

Resistance Level for Putting Stop Loss Order Level for Sell Trade

Resistance Level for Placing Stop Loss Order Level for Sell Trade

You can also use stop loss stock orders to lock in profits, Not Just for Preventing Losses

The advantage of a stop loss stock order is that you do not have to monitor on a daily basis how the stock market is performing. This is especially handy when you're in a situation which stops you from watching your trades for an extended period of time, or when you as a trader want to navigate to sleep after trading the whole day.

The disadvantage is that the stock price at which you set and place these orders could be activated by a short-term oscillation in price. The key is picking a stop loss percent which allows stock price to fluctuate within the day to day range while capping the downwards side risks.

These stock orders are traditionally thought of as a way to cap losses thus the title. Another use of these stop loss orders is to lock in profits, in which case it is known as a trailing stop loss.

For a trailing stop order it's put at a percentage level below the prevailing market price. This trailing level then shifted as the trade transaction position unfolds. Using a trailing stop loss level allows you to let profits run while at the same time ensures that should the stock trading market turn you will have locked in some of your profits.

These stock orders can also be used to lower risk if a trade starts making money. If a trade makes a lot of profit, the stop-loss order can be moved to the break-even point, which is where you started buying. This makes sure that even if the trade goes against you, you won't lose any money, and you will break even on that trade.

Trailing stop orders are used to make the most money and protect it when the stock price goes up, and to limit losses when it goes down.

A prime illustration involves employing the Parabolic SAR Stock Indicator and systematically advancing your stop order to align with the current Parabolic SAR level.

Parabolic SAR Indicator for Putting Trailing StopLoss Order in Indices

Parabolic SAR Technical Indicator for Placing Trailing StopLoss Order in Indices

Another example is where a trader moves his stop loss by a specific number of pips after every few hours or after every 1 hour or after every 15 min depending on the chart time frame that the Stock Index trader is using.

In the stock trading example mentioned earlier, the parabolic SAR, set at 2 and 0.02, was employed as the trailing stop loss order for the chart above. The trader would have continuously adjusted the trailing stop loss level upwards after each SAR was indicated until the Parabolic SAR Indicator was triggered and the trend reversed.

Conclusion A stop order is a simple trading tool, yet so many investors fail to use it. Whether it's used to prevent excessive losses or to lock in trading profits, nearly all trading styles can benefit from this trading tool.

Factors To Remember When Setting These Stop Loss Orders

Here are some key points to remember:

  • Be careful with the points where you set these stop-losses. If indices normally fluctuates 20 points, you don't want to set your stoploss order too close to that range else you'll be taken out by the normal market volatility

  • StopLoss Orders take the emotion out of a trading decisions & by setting one you set preset point of exiting a losing trade, intended to control losses.

  • Traders can always use indicators to calculate where to put these levels, or use the concepts of Resistance & Support to decide where to set these stop loss orders. Another good technical indicator used to set these stop loss order orders is the Bollinger bands where traders use the upper & lower band as the limits of stock price therefore putting these orders outside the bands.

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