Abstract

Stop Loss is often seen as a powerful weapon at the trader's disposal. However, almost everyone has gone through situations where Stop Loss behaved is like a trap.In this article we will analyze these two perspectives that we can give to the use of Stop Loss and with practical examples of its application in JForex.


The Stop Loss

For those who are more familiar with this terminology, a Stop Loss is a negative order instruction that closing our main order. In this context a Stop Loss means a closing order when the market goes against us and forces us to take losses.
It may seem strange and counterproductive that we are closing our order while losing. Why we not wait for the order to be positive and then close the order. This rationale is logical, the problem is when our order does not stay positive and is losing more and more and the use of Stop Loss would have been advantageous.
However, we also have cases where the market fluctuates rapidly and our Stop Loss has been activated, causing losses if we did not have Stop Loss there, our order had a positive result.
Traders sometimes complain that it seems the market was even at the price where our Stop Loss was placed. However this is a normal behavior of the market variation. When we put a Stop Loss very close to a strong support or a strong resistance, it is normal for the market to evolve to that position. The way to avoid this situation is to slightly increase the distance of the Stop Loss in relation to the supports and resistances, thus avoiding the so-called "obvious places".
With this technique we will lose a little more when Stop Loss is reached, but we will increase the number of orders in which Stop Loss is not executed getting our order to close with positive result.
Another way to apply Stop Loss is to use a dynamic Stop Loss using Trailing Stop Loss [1].


Manual or automatic Stop Loss

If we define Stop Loss when we create our order this is an Automatic Stop Loss. In turn, if we open our order without the Stop Loss set and manually execute the closing of the order in negative, this is a Manual Stop Loss.
There are “Non-technical issues”, in which some traders are of the opinion that by placing an automatic Stop Loss we are revealing to the Broker and to the Market our intentions. But nevertheless a Manual Stop Loss requires constant monitoring of the market. Another disadvantage of Stop Loss manual is that the trader must have the discipline and determination to execute Stop Loss. In these situations the Trader can be confronted with thoughts like: "Let it see if the market recovers a little more."The automatic use of Stop Loss guarantees the discipline and coolness that the human mind does not always allow.By weighing all these factors and especially for the less experienced it is clearly better to use an automatic Stop Loss.

The Stop Loss like a weapon

The following pictures describes the Stop Loss like a weapon.



The Stop Loss like a trap


The following pictures describes the Stop Loss like a trap.



Stop Loss in practice

In the following examples we will see a strategy in Jforex and the associated results. The Strategy has two main configurations. The first with Stop Loss and the Second without Stop Loss defined (or with a very high Stop Loss).

  • First strategy


The following pictures show the orders.



The following pictures show the results.



  • Second strategy


The following pictures show the orders.



The following pictures show the results.


As you can see in the pictures above the strategies with Stop Loss (or with a not very high Stop Loss) are better results.

Conclusion

As we have seen in this article, there are no solutions or magic formulas for placing Stop Loss. Time is helping us to improve our strategy.
We are often led to think that it is not worth using Stop Loss and that Stop Loss is a trap. However achieving Stop Loss is not always bad. We have to think that achieving Stop Loss was the way to avoid a greater loss.
From my experience as a trader the use of Stop Loss is very important and is clearly a weapon, an ally that we have at our disposal.
Stop Loss is essential for the survival of a trader. Especially for those traders who think they know more than the market.


References

[1] http://www.investopedia.com/articles/trading/03/080603.asp
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