Top Three Stop Loss Methods

Stop losses enable traders to calculate their risk per trade and maximize profit. They are orders placed by traders that will close the open position if the trade moves in the wrong direction. For example, a stop may be placed to sell if the price drops, if a trader was long EURUSD.

Stop loss methods can be roughly categorized into two different types: Trailing Stops and Fixed Stops, while there are two commonly used types of Trailing Stop. Read on to find out more about the three most commonly used methods, their advantages and disadvantages, and how you can make them work for you.

1. Fixed Stop

What it does:
A fixed stops enables a trader to place their stop when they open their position. The stop can then be left until the position (trade) is closed, either manually by the trader, or because the stop loss or profit target was hit.

Why it’s a must-have:
This type of stop loss is helpful as it allows you to know your exact risk per trade. It also gives the trade room to move around, and hopefully turn in your direction. This will prevent you from being stopped out too early and losing profit.

How best to use it:
Fixed stops are most useful for traders placing large position trades. Here, the trade will be closed out manually with market profit targets, but knowing your exact risk at the outset is still useful. They are useful for traders who find themselves in the right direction of a trade, but notice their stops get taken out too quickly. Fixed stop losses can help you get back in the money.

2. Manual Trailing Stop Loss

What it does:
A manual trailing stop loss allows traders to make risk reward on their chart. Instead of using profit targets, the stop loss will only be moved when a key target is hit. Instead of using fixed stops, traders are able to put the stop slightly below a recent swing low if they are long, or above a recent swing high if they are short.

Why it’s a must-have:
Manual trailing stop losses still give the trade room to move, but allow you to lock in profit.

How best to use it:
Typically, when using manual trailing stop losses, traders will wait for their 2nd profit to be hit before moving their stop up one level. This gives the trade room to run while also allowing traders to maintain a good risk reward structure. It also makes it possible to lock in profit on quick movers.

3. Automatic Trailing Stop Loss

What it does:
An automatic trailing stop loss is an automatic order set up on a trading platform with fixed rules. The traders sets the stop loss distance and step size in pips, and the stop loss will move for every step size movement up (if long) or down (if short).

Why it’s a must-have:
It maintains your stop level and provides a fixed risk profile.

How best to use it:
Automatic trailing stop losses are typically less flexible than other methods. It is usually best used where a fixed risk profile is required. It lacks the ability to consider how price is moving, and therefore can place stops at levels that may be easy to take out to early. It does not give the trade much room to run in comparison with other methods. Often, traders have a good amount of knowledge and strong risk reward, but are so strict on stop losses that they forget to use the same skills they are using for entry for stop loss placement in reverse. Here, it may be best to take a step back and try a different method, to give your trade more room to move.

Got more questions about stop losses? Something else in FX giving you a headache? Read more from our Learn with Littlefish series here, or get in touch by contacting us by email, or tweet us @LittlefishFX