A stop loss is one of the most important order types in trading.
In this tutorial, I'll go over what a stop loss order is, how to implement it, and I'll answer some frequently asked questions at the end.
After you read this tutorial, you'll know everything there is to know about entering a stop loss.
What is a Stop Loss Order?
All trading platforms that I've seen have a stop loss feature.
Some are easier to use than others, but the basic function is the same.
A stop loss order is a type of order that traders use to limit their loss on a losing trade or lock in profits on a winning trade.
To be more specific, a stop loss is a pending order that only gets executed if price hits your stop loss level.
A pending order is an order that sits on the broker's server until the conditions of the order are fulfilled. In the case of a stop loss, that condition is price hitting the stop loss price.
Once price hits your stop loss price, it turns into a market order, which means that it will execute the trade at the next available opportunity.
That means that there has to be someone in the market who is willing to take the other side of your trade.
In very large (liquid) markets, the trade usually gets filled very quickly and at the price you set. Some examples of markets are large cap stocks, Forex and large cap cryptos like Bitcoin.
However, in small (illiquid) markets, the price that your trade finally executes at might be different from the price that you set your stop loss at. This is called slippage. Some commonly illiquid markets are options, micro cap stocks and altcoins.
If you're trading in an illiquid market, find out if you can enter a stop loss that turns into a limit order instead of a market order.
A stop-limit allows you to set a limit price so you won't lose money if the only available trade is at a price that worse than your limit price.
Not all trading platforms offer stop-limit orders, so be aware of potential slippage before place your stop loss orders.
Traders usually enter a stop loss at the same time that they open a trade.
How to Place a Stop Loss to Limit Losses
The most common use of a stop loss order is to do as its name suggests.
It will limit the loss that you have on a trade.
In the chart above, the red line at the bottom of the chart represents a good place to enter a stop loss order for a long trade.
The trade would be entered at 0.63264 and the stop loss would be at 0.61617.
If price goes lower than 0.61617, then the long trade will be closed.
A stop loss order allows a trader to automatically exit a trade at a predetermined amount of loss, thereby protecting the rest of their trading capital.
Many traders use a percentage loss stop loss which risks only X% per trade. A common amount to risk per trade is 1%.
If you risk 1% per trade, you would have to be wrong 100 times in a row to lose all your money.
Even if you were just guessing, I don't think that you could be wrong 100 times in a row.
Therefore, using a stop loss protects your capital when you're wrong, so you'll be able to take advantage of the times when you're right.
How to Use Stop Losses to Protect Profits
You can also use a stop loss to protect profits.
Let's take a look at the same trade above, but this time, price has moved into profit.
The blue line is the trade entry price and the red line is the new stop loss level.
To protect your profits, you could move your stop loss up to 0.63634, locking in 37.4 pips of profit on the trade.
Moving your stop loss to lock in profit is a great way to ensure that you'll make money on the trade, but also gives you the opportunity to make even more money if the market locks into a strong trend.
Regardless of what happens though, you'll have peace of mind knowing that you've locked in a guaranteed profit.
How to Place a Stop Loss Order on Popular Trading Platforms
Stop loss orders are usually easy to place.
All trading platforms allow you to place a stop loss when you enter a trade. After you enter a trade, you can also edit your stop loss, or enter one if you forgot.
I'll give you a few examples from different trading platforms, so you can see the process in action.
How to Place a Stop Loss in MetaTrader
The MetaTrader order entry screen has a stop loss field just below the volume field.
An easy way to enter a stop loss price is to first click either the up or down arrow next to the stop loss price.
This will automatically enter a price that's close to the current price. Then you can manually edit the price to set your stop loss.
Using this method will save you time and is particularly useful for day traders who need to enter orders quickly.
How to Place a Stop Loss in TradingView
TradingView has the best stop loss screen that I've ever seen.
It allows you to set a stop loss in pips/dollars, at a certain price, or by percentage risk.
To enter an order, right-click on any chart and click on:
Trade > Create new order…
Then the order entry box will appear. Check the box next to Stop Loss and enter your stop loss in your preferred format.
Finally, click on the Buy or Sell button and your order is placed.
How to Place a Stop Loss in thinkorswim
TD Ameritrade has a couple of different trading platforms that you can use, but I'll show you the thinkorswim example because it's the simplest.
Entering a stop loss is pretty complex on this platform, but it's easy once you know how to do it.
While you're entering your entry order, click on Advanced Orders > 1st trgrs OCO.
This will enter a stop loss order once your trade gets filled.
To get a complete tutorial on how the platform works, watch this video.
It shows an older version of the software, but the core principles are the same.
Yeah, I don't know why they make it so complicated.
But now you know how to do it.
How to Place a Stop Loss in Binance
The process of setting a stop loss order in cryptocurrency can vary greatly by exchange.
In this example, I'll show you how to use Binance because it's one of the most popular exchanges.
On Binance, you'll be using the Stop-limit function.
Although this example will be shown on Binance, check with your specific exchange on how to set a stop loss on your trading platform or exchange.
Here's a complete tutorial on how to set a stop loss on the Binance trading platform.
Where Should You Place Your Stop Loss?
Now that you know how to place a stop loss, this is the next question that new traders ask.
Knowing where to place your stop loss comes with practice.
You want to put it in a place where it won't be triggered by normal market fluctuations.
But you also want to set it as tight as possible to make maximum return on your trade.
It's a balancing act.
To learn where to place your stop loss, read this tutorial.
Should You Move Your Stop Loss?
Moving your stop loss to increase your risk means that you'll have a bigger loss than you originally planned for.
That's a recipe for disaster.
There is only one situation when you should move your stop loss…when you want to lock in profits.
How you do this is beyond the scope of this tutorial, but you can learn how to trail you stop loss here.
When you trail your stop loss, you might make way more profit than you would have expected because you are letting your winners run and cutting your losses short.
Do Brokers Hunt Your Stop Loss?
Legitimate, regulated brokers will not hunt your stop losses.
Who knows what dodgy, unregulated brokers do.
That's why it's important to trade with a reputable broker.
But if you're trading with a reputable broker and you feel like your stop losses are getting picked off, then this is probably the reason.
Once you understand how to set a stop loss order in one market, you'll know how to figure out how to do it in other markets, even if the process isn't exactly the same.
Using a stop loss on your trades is the best way to limit your risk and lock in your profits. If you haven't been using stop losses, then you should really consider using them.
In all fairness, not all professional traders use stop losses.
There are also some trading strategies that perform better when you don't use a stop loss.
But the vast majority of traders and trading strategies perform better with stop losses.
So get to backtesting and figure out the best method for placing your stop loss orders.