How To Set A Trading stop order
Besides limiting risk and helping you take small losses, a trading stop order is incredibly valuable because it can protect profits on winning trades. You must develop the discipline of locking in profits. You can enforce this discipline using one simple technique: trailing stops.
A trailing stop is a trading stop order you place below the current price of a long position, progressively moving it up as the price of the position increases so that the trading stop order follows the position up. For a short position, you set a trading stop order above the current price and then move it progressively down, following the position as it trends downward.
How can you make sure you protect your profits on winning trades? The answer is to use trailing stops. This means that once you have a profit, you move your trading stop order nearer to the current price so you’ll stop out with most of your profits intact if the position turns downward. What if the trading stop order executes and you decide you want to trade the position again? Easy:
You buy it back at a better price than you sold it for, and then ride it up again. That’s how a good trader makes and keeps money.
Setting a trading stop order is both an art and a science, and there aren’t many hard and fast rules to follow. Here are a few guidelines to keep in mind as you practice and develop the skill of setting a trading stop order.
Understand Individual Brokers’ Rules
Another rule some brokers have is that a trading stop order can’t be set more than a certain percentage lower than the current bid (or, on a short, higher than the current ask) — for example, no more than 30 percent lower (or higher). We have no idea why you’d ever want to lose 30 percent of the value of your trade before stopping out, and we would never set a trading stop order that low.
Stay Focused When Setting A Trading Stop Order
That’s why you need to make sure you don’t enter a limit order out of habit when you mean to place a trading stop order . If you place a limit sell order at a price below the current bid (at the place where you meant to place your trading stop order), it will execute right away and you’ll be out of the trade. Always review trading stop order carefully before placing them. Look at your order again and think it through one last time.
Some brokers have rules about where a trading stop order can be set. For example, some have a rule that protective stops must be set at least a minimum amount below the current bid when you’re long (stop sell), or above the current ask when you’re short (stop buy-to-cover). For example, the rule may be that a stop sell order must be at least .25 below the current bid.
You’d think it would be impossible to place a limit order when you mean to place a trading stop order, but it’s actually quite possible when you’re in a hurry. Since you should be in the habit of using limit orders to enter positions, placing them should be almost second nature.
