Being a successful trader doesn’t mean avoiding loss altogether; it means controlling your losses – and profits – when they occur. Read on to find out more about how stop losses can help you to keep control of your trades, and where you should apply them.
1. The 2% rule
Some traders believe that you should never risk more than 2% of your total trading capital in any given trade. If you only ever risk 2% of your capital, then you should be able to see out several losses while still having the ability to take advantage of profitable opportunities where they appear.
To use the 2% rule when placing a trade, take 2% of your total capital and set your stop that distance from the current price of your market. Remember to always take the spread into account when placing your stop.
2. The support and resistance method
Support is the level at which a market will tend to bounce upwards after a loss, and resistance is the level at which a market will tend to bounce downwards after an upward move. If a market breaks through either level, it will often carry on in that trajectory.
The support and resistance method therefore involves putting your stop just beyond the support level if you are buying a market, or just beyond the resistance level if you are selling it.
3. The average true range method
The average true range (ATR) method uses the ATR indicator, which is available under the ‘technical analysis’ tab on our charts. The ATR indicator will show you the average volatility of a market over the past 14 days.
To use this method, take a percentage of the ATR of the market you wish to trade and use that figure to decide where to place your stop. So if you are trading gold when it has an ATR of 13, and you want to limit yourself to 20% of that figure, then your stop loss should be placed around $3 away.
Stop losses vs guaranteed stops
Remember that basic stop losses do not guarantee that your trade will be closed at your specified level.
If you want to be completely certain that your stop will close out at a certain level, use a guaranteed stop instead. If the guaranteed stop is triggered you’ll be charged a premium, but you’ll have complete peace of mind that your trade won’t gap beyond your stop.