Methods of Setting Stop Loss Stock Trading Orders In Stock Trading
Traders using a stock trading system must have mathematical calculations that reveal where the order must be placed.
A Stock trader can also place a stop loss stock trading order according to the technical indicators used to set these orders. Certain technical indicators use mathematical equations to calculate where the stop loss stock order should be set so as to provide an optimal exit point. These indicators can be used as the basis for setting these orders.
Other stock traders also place these orders according to a predetermined risk to reward ratio. This method of setting is dependent upon certain mathematical equations. For example a ratio of 50 pips stop loss can be used by a Stock trader if the trade has the potential to make 100 pips in profit; this is a risk reward ratio of 2:1
Others just use a predetermined percentage of their total trading account balance.
To set a stop loss order it is best to use one of the following methods:
1. Percentage of stock trading account balance
This is based on the percent of account balance that the stock trader is willing to risk.
If a stock trader is willing to risk 2% of account balance then the stock trader determines how far he will set the order level based on the position size that he has bought or sold.
If a stock trader has a $100,000 account and is willing to risk 2% then the position size of the trade that they will open for Stock will be determined by this 2% stop loss level.
2. Setting Stop Loss Stock Trading Order using Support and Resistance Levels
Another way of setting stop loss stock orders is to use supports and resistance levels, on the trading charts.
Given that stop loss stock trading orders tend to congregate at key points, when one of these levels is touched by the stock price, others are set off, like dominos. Stop loss orders tend to accumulate just above or below the resistance or support levels, respectively.
A resistance or a support level should act like a barrier for stocks price movement, this is why they are used to set stop losses, if this barrier is broken the stocks price movement can go towards the opposite direction of the original stock trade, but if this barriers (support and resistance levels) are not broken the stocks price will continue moving in the intended direction.
Stop Loss Stock Trading Order level using a resistance level
Setting order above the resistance
Stop Loss Stock Trading Order level using a support Level
Setting order below the Support Line
3. Stock Trading Trend Lines
A stock trend line can be used to set stop losses where the order is set just below the stock trend line. As long as the stock trend line holds the stock trader will be able to continue making profits while at the same time set this order that will lock his profit once the stock trend line is broken.
Setting order below the stock trend line
Example of where to set this order using stock trend lines.