You might be familiar with the Stop-Loss order. It is a mechanism to limit your losses or protect your profit. Similar to the Stop-Loss order, there are other stop orders you can use for your trading. You can use stop order to enter a trade. Stop-orders will give you more control over your entry and exit points. Read on to find out more about stop orders.
A common stop order is a Stop-Loss order. When you enter a trade, you will use a stop-loss order to limit your losses. Similar to a stop-loss order, there are other stop orders useful for traders. Buy stop and Sell stop are the other two stop orders you should be familiar with.
Stop Loss
Buy or Sell order entered ahead of time to execute when the market reaches a pre-determined price known as the stop-price. Once the market reaches the stop-price, the stop-loss order will become a market order.
Stop-Loss order helps limit your losses. Using stop losses is how you manage risks. For each trade, you know the risk amount you want to take. Using a stop-loss order, you will limit and control your losses to the risk amount you have determined for your trade.
Often the stop price is determined by the technical trading levels of support and resistance. Many times the trader will study the chart and determine the effective stop price for the trade. Such a stop-loss order takes into consideration the short-term movements of the market. Here the risk amount needs to remain the same so the position size will have to change to keep the trade within the risk amount.
Once the market price touches the stop-price, the stop loss order will become a market order.
Calculate the Stop-Price for your order
You can use a simple stop-price calculation. Keep the stop-loss order at a certain amount of PIPs or points away from the entry point. Another option is to use Technical analysis. Find the Support or Resistance levels and place the stop loss just above the Resistance level for short and just below the Support level for long positions.
When you use Technical Analysis, you need to adjust the position size for the stop-price and the risk level.
Simple Stop Method
EURUSD buy order 1.1838
Simple Method: Use a standard PIP distance from the entry position.
Stop Loss order at 38 PIPs below the position. SL at 1.1800
Take Profit order at 76 PIPs above the position. TP at 1.1914
Position size will remain the same for all orders. Calculate the Position Size
For the simple stop-price calculation, every entry order will have a default stop-price, for example, 36 PIPs away from the entry. You can calculate the position size using the below.
EURUSD
Account balance = $5000.00
Risk per trade = 1%
Overall risk = 5%
Each order can risk up to 1%
Risk is 1% = $5000 * 01 = $50.00
Each trade can risk up to $50.00
Buy order = 1.1838
Risk = $50.00
Stop Loss = 1.1800
PIP cost = $50/38 = $1.1358
PIP cost for one 100K lot = $10
Lot size for $50 risk = 100K * $1.1358/10 = 13.157K
Position Size = 13K lotBased on the above calculation, to keep with your level of risk of 1%, and the stop loss of 38 PIPs, your position size should be 13K.
Stop Price using Technical Analysis
If you use Technical analysis to arrive at the Stop-price, then keep the risk level of 1% and determine the position size using the below calculation.
MES - Micro E-mini S&P 500 Contracts
Buy at 14.0
Resistance level from Technical Analysis is at 5.0
Set the Stop Price to 4.0, one point below the resistance
Stop is 10 points below.
Risk is 1%
1 Tik = $0.25
1 point = $5.00
10 points = $50.00
Position size = 1 MES contractSimple Stop Price
Stop Order is a certain amount of PIPs above or below the entry price
For Buy orders, the stop-price will be the same amount of PIPs below the entry print
For Sell orders, the stop-price will be the same amount of PIPs above the entry point
The position size will not change. All orders will have the same position size.
Technical Analysis Stop Price
Find Support and Resistance Levels
For Buy orders, the stop-price will be just below the Resistance level
For Sell orders, the stop-price will be just above the Support level
The position size will change for each order
Calculate the position size from the risk and the stop-price
Trailing Stop Loss
Stop loss order that is adjusted automatically to protect the profit. Trailing Stop can adjust for TICK, PIP and POINT movements.
Trailing Stop orders can adjust the stop order as the market moves in the direction of the trade. It is a mechanism to protect profit. A trailing stop is triggered after the trade has gained a profit. The stop-loss order is adjusted after each TICK, PIP, or POINT movement in the direction of the trade. You can set up a trailing stop for a fixed amount of PIPs away from the current market price.
Automatically adjust stop-loss order as the market moves in the direction of the trade.
Stop-loss is adjusted only in the direction of the trade, not in the opposite direction.
When the market direction changes, the stop loss stays in its last location.
The Trailing Stop becomes a stop-loss order if the market changes direction
Trailing Stop protects the profit in case of a reversal
Tight stops will cause stop-outs. Give enough room for market fluctuations.
Buy Stop Order
Buy order where you specify a stop price which is higher than the current Ask price of the market.
Uptrend Breakouts
Use Buy Stop for uptrend breakouts. If you anticipate an uptrend breakout, then place a buy stop just outside the breakout point. If the breakout doesn't happen, then you can cancel the buy stop order. If the breakout happens, then you benefit from the breakout. This is better than placing a buy order at the market price. Unlike market orders, you can cancel the buy stop order without penalty. If the breakout does not happen, you will not end up with a losing trade. A Buy Stop order will take advantage of the breakout; If it doesn't happen, you can cancel the order.
Scale into a Winning Long position
Use Buy Stop to add on to a winning trade. Space out buy stop orders at increments. As the market moves in the uptrend and reaches the buy stops, the buy orders will add to your position. Use a staggered approach to increase the position size using buy stop orders. It carries less risk than buying a large position at the beginning. Adding on to a winning trade helps maximize the profit. If the uptrend did not materialize, then you can cancel the buy stop orders.
See below the Buy Stop order for EURUSD. Market Ask is 1.17617. The Stop price for the buy stop order is 1.17895. I have placed the buy stop order 27.8 pips above the Market Ask. If a breakout materializes, then the buy order will be executed. If the marked turned around and moved in the opposite direction, then I will cancel the buy-stop order.
The trade will be executed as the market breaks out to the uptrend and reaches the buy stop price.
Buy Stop Order Characteristics
Buy Order is placed above the current market ask price
Used for uptrend breakout and scaling into positions
Buy Stop order becomes a market buy order as the market hits the stop price.
Sell Stop Order
Sell order where you specify the stop price which is lower than the current Bid price of the market.
Downtrend Breakouts
Use Sell Stop in a downtrend breakout. Place a sell stop order below the breakout point. If a downtrend breakout happens, then the sell order will be executed. You will not miss out on a trading opportunity in a breakout. Using a sell stop is better than going with a market order for a short; if the breakout did not materialize, then you will end up with a losing trade. Your sell stop order is executed only if a downtrend is established. If the market turned around without a breakout, then you can cancel your sell-stop orders incurring no losses to you.
Scale into a Winning Stort Position
How do you scale into your winning short positions? As your initial short position moves into profit, you have the option to add to the trade to maximize your gains. You place stop sell orders at each incremental point. As the market moves into profit and reaches the sell stops, the sell orders will execute and add to your short position. Scaling helps you strategically grow your position in small increments.
See below the order ticket for a Sell stop order for USDCHF. The market is in a downtrend. The bid is 0.91785. The stop price in the sell stop order ticket is 0.91604. Sell stop order is18 pips below. As the market moves down and reaches the sell stop, the sell order is executed.
The Sell Stop order is executed if the market breaks out in the down tread and reaches the sell stop price.
Sell Stop Order Characteristics
Sell Stop order is placed below the current market bid price
Sell Stop order becomes a market order as the market hits the stop price
Used for downtrend breakout and scaling into short positions
Special Instructions for Stop Order
Use timing instruction of DAY for Stop orders.
DAY orders that haven’t been executed are canceled at the close of the trading day. GTC or Good till Cancelled orders are not good for Stop orders. The market conditions can change in short durations. Evaluate the market to make sure the opportunity is still valid for the stop order. If the market has changed direction or moved to a new pattern, then the opportunity and the stop order may not be valid any longer. Use DAY instructions to make sure that the stop order will be canceled before the close of the trading day.
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