Traders who want to improve their efficiency and benefit should really learn new instruments and techniques, and the Stop Loss is one common instrument that first-year traders speak about. Pro traders are split as to whether or not Stop Loss is really beneficial. Here is a rundown of the pros and cons so that you can refine your own trading strategies to your specifications and potentially “up your game” in the process.
Is Stop Loss a trader’s best friend?
You’re setting Buy and Sell orders each day, but there’s very little certainty in the markets, no matter how diligent you are with your analysis. Most probably you will have a mixed list of wins and losses. To be a successful trader you need only have more positive results than negative. This can be achieved with trading knowledge and risk management strategies, but pro traders don’t always agree on what works and what doesn’t. Most ebooks for beginners will tell you to protect your account funds by diversifying your trades (multiple smaller orders), not abusing leverage, and setting a Stop Loss for every trade.
Makes sense—or does it? If you set a Sell order in the morning and then go to work just before the price enters an unexpected rally, you could arrive home that evening with high expectations only to find your account in bad shape. This happens to newbie traders all the time. Setting a Stop Loss seems like the wise thing to do, sadly, you should also consider some drawbacks to using a Stop Loss. Let’s expand your perspective so you can start thinking like a pro.
Stop Loss is for newbies
Let’s say you set a Buy order for XAUUSD—after a rapid fall—with expectations of a rise. To protect yourself, you set a Stop Loss.
It was a good choice to buy, but your entry wasn’t the best. In the above case, XAUUSD started to fall and before the rise could kick in, your Buy Order reached the Stop Loss point. In this case, you would get home from work with optimism thinking you’d be in profit. What you’d find is a small loss.
Top Tip: Most savvy traders won’t place a Buy order directly after a sharp fall. You are looking for evidence of a reversal. On the graph above you can see three major spikes that reversed without warning, but these are very hard to predict and most traders would simply not trade during those times.
If you’d waited for the fall to lose momentum and change direction before opening an order, you would have had much better results. Don’t rush into a trade. In the long run, you can expect better results by verifying the reversal.
An alternative to Stop Loss
Setting up a pending hedging order is one very simple alternative. With a Take Profit near your Purchase Order entry point, consider setting a Sell Order slightly below your Buy Order. Your Sell Order will offset losses if the price drops. Your Sell Order will close if the price reverses, and your Buy Order can ride the positive move all the way.
The Last Word
It is certainly possible to improve your trading performance by using such tactics, and your results should be significantly better in the long run. It’s the difference between newbie traders and pro traders. Once you’ve got an Exness account, open up a chart and look back on price moves. You might find a lot of reversals that would have activated Stop Loss and restricted profits. Apply the alternative to see the difference. Only when you fully understand the mechanics of a hedging order should you consider using it with real investments.