Stop loss orders - learn the right way of setting them
To decide the optional point in where to place your stop loss within a CFD-trade is one of the most important factors for profitable CFD trading. I have therefore listed 6 tips and strategies that have helped me decide these points in the past:
1. Learn to accept many small CFD losses using stop loss orders
This will enable to you to protect your capital for the better and more profitable trades with a bit of forward thinking. An easy way to do this by using the 2% capital rule (or at the most 5%) which means that a trade I stopped it should not cost more than 2% of your total trading capital. For example, if you have 200 USD in your trading account, you should not risk more than 40 USD in one trade.
2. Trade in quantities that make it possible for you to ‘comfortably’ stop
This tip is based more around the notion of timing and you should have the ability stop a trade well in advance to avoid the fact that the stop will be activated too soon in normal trading conditions. This will give your trades more time to make a profit.
3. The price will be divided by your stop loss level which might mean that you lose more then you expected
When the price is closing in on your stop level you might still be convinced that the market will turn so you move your stop again, the price continues to drop and you move it again etc. Without you knowing it, you looking at huge unprofitable trade and you will have the need to deposit more funds in to your account.
4. Most traders only know when they start a stop loss on a CFD trade so they will always know the maximum amount that they are risking
One of the most important things to understand in trading is the time to exit a trade. It is not about getting it right or wrong but more about how much you will earn when you get it right and how much you will lose when you get it wrong. Therefore, carefully calculate the risk and reward with the trade on how you set the stop loss before you place the trade.
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5. Even worse than keeping losing positions is a trader that buys more CFD’s in the same instrument during a price fall
Never use this strategy and don’t fall for the temptation to add to your losing potions. Even though the median value lowers the cost of the trade will the exposure in risk increase within one single instrument. If you don’t have endless of capital, you must learn to cut your losses quickly even though the thought of exiting the trade at a loss might be daunting.
6. Learn from your mistakes
Traders that start off with a streak of profitable trades can often times become too confident yet you learn more from your losing trades and this will make you better trader in the long run.
We hope that this article on stop loss orders has given you the information you need. The next natural step is to use the free educational material and free demo account that our recommended CFD broker provides: