How to Properly Place a Stop Loss Order â Why Yours Keeps Getting Triggered
A stop loss order is designed to limit your risk on any trade. Using it effectively is a cornerstone of any good risk management strategy. If you donât already have a strategy in place, you should seriously consider creating one to safeguard your trading capital. A properly set stop loss order can help minimize risk and keep you in the game for the long haul.
However, many traders find their stop losses get hit, only to watch the trade reverse and move in the desired direction right after. So, why does this happen?
The Wrong Way to Place a Stop Loss
Imagine you decide to risk no more than 2% of your account on a trade. With a $10,000 balance, this means you're willing to lose no more than $200 per trade. Looking at the chart, you decide itâs time to go long and buy two contracts of the SP500 futures (e-mini). Each point movement in the SP500 represents $50, meaning two contracts expose you to $100 per point.
You place your stop loss at 2,468 to maintain your 2% risk limit. Confident in your decision, you feel like a seasoned pro. But minutes later, your stop is hit, and you think, âAt least I managed my risk.â
But did you really? In reality, you placed a low-probability trade, setting your stop at a level likely to get hit. You unknowingly did the opposite of what professional traders would do.
The Right Way to Place a Stop Loss
Letâs revisit the same scenario with a better approach. The question you should be asking is: when does the uptrend actually reverse? A critical point would be when sellers take out the 2,466 low.
Knowing that below 2,465, long positions are likely to be liquidated, you place your stop at 2,464.75. To maintain your 2% risk level, you limit your entry price to no more than 2,466.75. This strategy may require patience, waiting for a meaningful dip to enter.
Alternatively, you can reduce your position size to one contract, giving yourself a wider 4-point risk cushion while keeping within your $200 loss limit. With this approach, you could enter at 2,468.75, increasing the odds of the trade working in your favor.
Yes, you'll make less profit with one contract, but your job as a trader isnât just about maximizing gainsâitâs about managing risk. By thinking like a risk manager, you're protecting yourself from losing more when things donât go as planned.
Why Most Stop Losses Get Hit Prematurely
Many traders, eager to enter the market, place stop losses too tight, focusing on quick gains. Professionals take advantage of this by pushing the market lower, triggering amateur stop losses, then buying at cheaper prices for the real move up.
A simple tweak to how you place your stop loss can make a huge difference in your trading success. Shift your focus from chasing quick profits to managing risk, and youâll notice significant improvement in your long-term results.
Try out this method and track your results for the next few weeksâit could revolutionize your trading strategy. Have you experienced better outcomes after adjusting your stop loss approach? Feel free to share your thoughts!
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