Using stops

In this lesson, we’ll take a look at how you can use both stop-loss and stop-entry orders to add discipline to your trading – minimising your risk, aiding planning and locking in running profits.

Using a stop-loss

Before opening a position, think about the maximum you’re prepared to lose on that trade. Remember, if you want a healthy risk-to-reward ratio, you need to control the amount of risk on each trade – which you can do by setting a stop-loss (a ‘normal’ stop in our platform).

As a guide, many traders wouldn’t risk more than 1% of their account equity on a single trade. By doing this, you’ll still have at least 99% of your account equity if the trade doesn’t go your way.

It’s important to note that the 1% rule applies to the total amount you’re willing to lose. This means if you have £10,000 in your trading account in cash or open positions, you’d cap your total loss on a single trade at £100 rather than buying £100 worth of CFDs, for example.

Once you’ve determined what percentage of your capital you’re comfortable risking, you can figure out where to put your stop.

Let's face it, no one likes to lose. Seeing a trade you’ve placed losing money can tempt you to keep your position open longer in the hope that the market will bounce back.

But this can completely throw off your strategy and worsen your losses. The markets are unpredictable – no amount of research or analysis can exactly pinpoint the future price direction of an asset.

That’s why it’s so important to commit to a stop once you’ve placed it. A common mistake traders make is to set a stop only to keep moving it further away from the current market price to prevent the trade being stopped out. This can eventually lead to higher losses than planned.

Another thing to carefully consider is where to place your exit level. Setting a stop too close to your opening price could mean your trade gets closed out from normal market movements. If this happens, you’d lose your capital, the spread you paid to open the trade and any potential profits you could’ve made if the market bounced back in your favour.

If using the 1% rule places your stop level too close to your opening price, you should really consider if you can afford to take on higher risk. It could be worth looking for smaller contracts.

Guaranteeing your stops

With all orders there’s a risk of slippage. During times of volatility, it might not be possible to fill a basic stop-loss at the exact amount you set.

You can remove this risk by using a guaranteed stop, which is free to set. You’ll only pay a small premium if it gets triggered. You can set these in the deal ticket. Just select ‘guaranteed’ from the ‘stop’ drop-down as shown below.

Using a stop-loss to lock in profit

Stop-loss orders aren’t just for protecting against risk – you can also use trailing stops to lock in your profits at the same time.

These automatically adjust your stop level to a market’s movement, meaning they follow your position if the market moves in your favour. So in the end, when your trade is closed out, you’ll still have locked in some profits.

You can choose a trailing stop in the deal ticket – just select ‘trailing’ from the ‘stop’ dropdown.

As your stop moves closer (or even past) the opening price, your risk-to-reward ratio improves.

Remember that trailing stops aren’t guaranteed, so they can be subject to slippage.

If you’re watching a position and the market is moving in your favour, you can also lock in profit by manually moving a basic or guaranteed stop to follow the market. You can do this by editing your stop in the ‘positions’ panel:

Or by manually dragging your stop level on a market’s chart:

Remember, while it’s ok to move a stop closer to a market that’s moving in your favour, it’s not good practice to move a stop away from a market that’s moving against you.

Using stops to open

You can also use stops to open positions – we call these stop-entry orders. They’re a good tool when you want to take advantage of a market trend.

You can set them in the ‘order’ tab of the deal ticket. You’ll know that you’re setting a stop-entry because when you've filled your stop order level, the platform will automatically update the order button to a stop.

Stop-entry orders can help you avoid acting impulsively on market movement.