Stop Loss – Learn To Limit Your Risks in Day Trade

Stop Loss is a protective order for your stock exchange operations. You program this order on your platform or on your Home Broker so that after you have entered a position, if you reach your loss limit stipulated in the order, it automatically closes your position.

Therefore, the Stop Loss order is an order that will protect you from a major loss or an eventuality that may happen to the open market at the time you are operating.

Why Use Stop Loss

It’s simple, because when we’re wrong in an operation we want to lose as little as possible and not become a fanatical supporter of that trade and only in the end realize that we zeos our account for a or a momentary emotional uncontrollability.

Keep in mind that some disasters may happen:

  • Your platform hang for whatever reason.
  • The connection to your broker fails for any reason.
  • Your computer/notebook shuts down or hangs.
  • Your monitor erases, your keyboard and/or mouse stop working.
  • All the previous ones.

Stop Loss vs. Stop Gain

As we’ve seen Stop Loss serves to protect us from a big loss but what the hell do I need Stop Gain for!?

Stop when I’m winning?

When I’m winning I want to win everything and a little

It would be great if it worked like this, lose little when you miss and when you get it right, win without limits.

But this reality we also know that it does not exist in the stock market so that is where stop gain comes in, because nothing goes up forever.

So basically it can be used in two ways:

1. When entering a transaction you may have factors that prevent the price from passing a region or even because your operational strategy defines that if the market makes you profit X you already zero that trade. In this case when making your entry, you will already place a Stop Gain order to be fired if the price reaches the stipulated amount and you exit that trade with the profit that has been set.

2. When entering into an operation, the market is in your favor and you are already in profit but believe that it can walk even further in your favor and is willing to continue in this trade.

So that’s where this other way to set up your Stop Gain comes in, because even if you’re willing to continue in the trade you don’t want to risk the market coming back against and failing to make a profit to take a loss.

In this case you will place a Stop Gain order below the price at which the market is leaving but at the same time above your entry price, so that if something goes wrong and the market comes back you will still come out with profit from the operation.

Setting Stop Loss

In particular for us Day Traders, this is a very important tool and we should know how to use it masterfully, because our operations last less time when compared to swing traders or investors who can do an analysis including with the closed market to know where to best position your Stop Loss and otherwise we as we do day trade have to do it in real time in the market and with a short time to reason.

An important factor for us to know how to correctly position our Stop Loss is to have an experience of the market in which we operate, to follow their movements and their volatility, so that we do not fall into a very common mistake that is to be stopped several times in the day and see the price going in our favor after the stop.

The market has what we usually call a balance sheet, which would be that normal move that the market makes up and down the price.

The beginner can often believe that if he puts a stop just below the entry he will always lose little and win a lot but in fact what will happen is that in this market balance he will always be stopped and that most of the time if he had positioned the Stop Loss correctly the operation would follow in his favor even if at times came a little against his position.

Another important factor is that this balance sheet may vary according to the level that the market is working on.

For example, currently the futuredollar has risen a lot and is even making historical highs reaching above R $ 5.50 and with this has a very large volatility, today it fluctuates from 5pts to 10 pts very easily, so it would be of no use to make a trade and position my Stop Loss 1pto below because I would be stopped at all times.

Already at a level of R $ 3,50 your balance could be around 1pto and in this case the stop of 1pto could even make sense.

Why Did You Skip My Stop Loss?

Before you think that it is the fault of the broker, the platform, the internet, or any other external factor it is important that you understand some points that I will explain below.

When you place your Stop Loss order you are just making a setup and when the market arrives in the condition that triggers that setting predetermined by you is that your order will be effectively placed in the order book.

This configuration can still be stored in 3 different places.

  1. On the stock exchange.
  2. At your brokerage house.
  3. On your platform on your computer.

And some platforms allow you to choose where you want it to be stored, remembering that you don’t have a better choice because any of them will bring advantages and disadvantages that will depend on your operational strategy.

Another important point is the concepts of Shooting Price and Limit Price.

Shooting Price: As its name says, it is the value that will trigger the order for the order book of offers when the market reaches it.

Price Limit: This is the price you agree to pay if something happens that you cannot execute the order at your firing price at that time, i.e. accept a price worse than the trigger price for your order to run at that time.

Stop Loss
Stop Loss Order Settings – TRYD Platform

It may seem bad this concept of price limit because when we lose we always want to lose little, so why do I have to accept losing a little more than my shooting price?

Here comes the most important concept of understanding this issue of stop jumping or stop hole.

As we saw earlier when the market arrive at the trigger price is that effectively your order will be sent to the book of offers to find a counter part and then your order will be executed.

It turns out that in very volatile markets, or at times when some relevant external factor happens, such as a political crisis or even like the pandemic we are experiencing, the volatility of the markets can get very high, i.e. the market swing will get higher.

At these times the price can rise or fall very quickly. If the market goes too fast by the price you set up firing it may be that when triggered the market is already at another level and your order will be in the book without starting and will be waiting to be executed.

It may also happen that the market when you get close to your shooting price, increase the spread which is the difference in the buy and sell price and go through your price level without making any tradeon your shooting price and then your stop order will not even be triggered.

To prevent the market from jumping its stop and you have a much bigger loss than expected is that there is the setting of the price limit.

I’m going to exemplify the concept.

E.g. You made a buy in the dollar futures value of 5420.00 and put your stop loss with 5pts at 5415.00 but when the market arrives at 5416.00 I came out a news and creates a high volatility and at this time opens a spread of 3pts causing the market to fall to 5413.00 and does not trigger your stop.

If you have put your price limit to only 1pto of difference, saying that you would accept only one stop until the 5414.00 your stop would still not be triggered and if the market fell further you would have to leave the operation manually or depending on your limit in the broker she would zero you charging high fees for this.

Now if you had put a limit price of 5 pts difference if the market still fell a little further you would still have your stop run up to 5410.00.

Remembering that even with this setting accepting stopar in 5410.00 the market would close its position at the best price, as in the example above sometimes even at 5413.00.

This way you would be avoiding a much greater injury just by correctly setting up your stop.

The Consistent Trader Tool

We can say that it is very common when we start studies on the stock exchange, especially in day trade operations, to think only of gains and most often even astronomical gains.

With this we stop thinking about the main thing that is to reduce our risks and consequently our losses when something does not come out as we expect or even if we have the advantage of wanting to have gains without limits and in the end we end up returning all profit and leaving in the loss for not knowing how to put in the pocket what has already been conquered.

Like everything in life, balance is the key to success. Knowing how to put a suitable Stop Loss for the market in which you operate to lose reasonably little when you are wrong and also know how to set up a befitting Stop Gain to maximize the gains and put them in your pocket, will be decisive for your success, so it is very important to have these two concepts clear and test them in practice for each day to improve their use.

I hope you have understood the concepts and can apply them in your day-to-day and with that is getting closer to achieving your dreams as a Day trader.

Good Studies and Good Trades!