In the previous article we saw how to define an effective trading strategy. In any strategy, it is essential to place stops and limits. How? ‘Or’ What? This is what we will see today!
The most successful traders are not just those who place the best orders. These are the people who have good risk management and who scrupulously follow their strategy. They are not affected by gains or losses. They set stop and limit levels and place orders accordingly. With TradeFW this happens to be essential.
When the limit is reached, the trading software closes the position and you hit the gains. The limit order allows you to choose the level of gains from which you want to close the position.
With a stop loss, you exit the trade when the maximum loss level (which you have set) has been reached. So you can limit your losses on a losing position.
Professional traders use the stops and limits that are the basis of any trading strategy. By placing them in all their positions, they no longer trade according to their emotions and can therefore let the market work for them.
Fans, on the other hand, do not use stops or limits. They remain glued to their screens, trying to process all their positions in real time. They miss many opportunities and let their emotions decide for them.
Setting stops and limits
- In principle, your stop should be closer to the opening price of your order than the limit. Thus, you realize gains even with less than 50% of winning trades.
- For example, if you place a limit of 100 pips and a stop at 30 on all of your positions, you only need to have a third of winning trades to make a profit.
- The level of stops and limits will depend on your risk tolerance. We must think carefully where to place them.
If a stop is too close to the opening position price, it can be triggered simply because of “normal” market volatility. This means that a temporary correction movement can close a position. Likewise, if a limit order is placed too far from the opening price, the potential profit will never be realized.