In a field rife with numerical calculations, inferences, speculations, quick actions…it's easy to forget the little things.
A stop loss is one of those little things, but it makes a big difference.
What is stop loss?
Stop Loss Order is also known as stop loss order. It is an order type used to limit the loss at a pre-set price.
As the name suggests, people use this order for the purpose of risk management, in case of adverse market movements, they can still limit the level of loss.
Stop-loss orders are usually placed in conjunction with buy/sell orders. Stop-loss orders are placed to limit losses in a predetermined position.
For example: You buy gold at $1.700 and place a stop loss at the price point of $1680. That means you are accepting a loss of $20. Instead of losing $100 if the price of gold drops to $1600.
What is stop limit?
Stop limit, also known as stop limit, is similar to Stop loss, it just differs in name.
Another point is that it has 2 prices: stop price and limit price. When the price moves to the stop price, a limit order will be placed.
Why cut loss?
Surely many people wonder why to cut losses? Selling at a loss. There are many people who are either overconfident in themselves or their ego is too big.
When trading they will take this stop loss lightly because they believe their choice is correct. Initially, they lost a few % then this number kept getting bigger and bigger. When they lose 50% of their assets, they have to earn back 100% to break even.
While taking a 10% stop loss, they only need to earn 11,1% to break even.
Therefore, the stop loss must be done decisively and with discipline, not based on emotions that "go hard".
Pros and cons of stop loss orders
- Limit the risk when entering orders to avoid strong pump dumps that make you lose a lot.
- Manage the risk of entry.
The downside is the price point where a stop loss can be triggered by a short-term, unexpected move.
Which people often call stop loss hunting ie stop loss hunting. Meaning you will get a stop loss then it starts to recover and go back to the starting price even higher.
How to cut losses reasonably?
There is no exact rule for where to place a stop loss.
This completely depends on the trading style. If you day traders can use 5% while long term investors can choose 15% or more.
Here are the ways to cut losses for everyone's reference!
Stop loss based on % of capital
This means you will set a certain % to stop loss, for example 3% of the account. You have an account of 1000 usd, so the first loss must not exceed 1 usd. So if you want to comply with this 30 usd loss, then when you trade 30 EURUSD, you set a stop loss of 0.1 pips (30 pip of 1 lot is equivalent to 0.1 usd). In the future, if you have a profit and your account reaches 1 usd, then your stop loss will be at 1.500 usd, from which you will calculate the appropriate trading volume.
This method of stop loss is the basis of all stops, because no matter what method the stop loss is calculated, it must be calculated as a percentage of the capital at that time.
Stop loss according to the pattern on the chart
This way of stop loss requires you to know about chart patterns – chart patterns – or candlestick patterns – candlestick patterns – or what patterns you are trading.
More specifically, for example, if you trade the head and shoulders pattern, you can stop your loss above the top of your head or above the top of your right shoulder.
If trading a double top, stop loss on the highest peak; If you trade the Evening Star candlestick pattern, then put a stop loss on the top of the candle in the middle of this 2-candle cluster… In general, you must understand this pattern + have experience with the pattern.
Stop loss according to the actual movements of the market
The market is constantly changing and at each stage, the price moves differently, so the stop loss is also different.
An indicator that can be used to measure volatility is quite popular that many brothers use, that is Bollinger Band. Bollinger Band is basically an indicator formed from a MA in the center, plus 2 standard order lines forming an upper and lower band.
The price will usually stay inside this band and when it goes out of the band that is its extreme state, and usually it will come back in after that. Therefore, the method of placing a stop loss with Bollinger Band is to place it a little bit outside of the 2 bands, in order to avoid "noise" price movements sweeping our stop loss.
How to place a stop loss Binance
Step 1: Go to the trading area and select stop-limit
At this point, there will be two blue buy (buy) and red (sell) tabs. For stop-limit orders, it is often used on the sell tab to cut more losses.
The buy tab still has some cases to be used to buy in cases where the price breaks the downtrend and turns to the uptrend.
Step 2: Fill in the command information
Next, you fill in the command information.
Example you bought BTC for $ 8900 and you accept a loss of $ 120 per BTC (stop loss at 8780), you fill in the following:
- Stop: 8800 (limit order trigger price)
- Limit: 8780 (limit order price)
- Amount: Amount of BTC you want to stop loss
These prices 8800 and 8780 mean that when the market price hits the 8800 level, the system will place a limit order at 8780.
- Stop price > limit in case you cut your loss on the sell tab. Price stop < limit if you if you want to buy on break of downtrend.
- There should be a gap between the stop price and the limit price. Because when the market fluctuates strongly, your order will be "drifted" (not matched) if you place these 2 prices too close together.
Step 3: Confirm command information
After you have filled in the information of a stop limit order, click the buy or sell button. The floor will display a confirmation of information. You just need to press the confirm button and you're done.
As for Binance App, go to the trading area -> select mua or in -> choose stop-limit -> set stop and limit price information as above instructions.
Here is a video about the stop loss order on Binance, everyone can refer to it. (You can adjust the Vietnamese subtitles for easy viewing).
Through this article, you already understand what a stop loss is, right? When trading, remember to cut your losses at the right time!
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