5 Powerful Stop Loss Strategies for Traders

Author: James Clark



The Most Effective Stop Loss Strategies for Traders



Many traders, especially beginners, underrate or misunderstand the concept of stop loss. No trade should ever end in a huge loss, and the best way to ensure this is by employing powerful stop-loss strategies. Your stop loss placement decides the risk/reward ratio of your trades. Hence, you need an effective strategy to ensure a timely exit.

In this post, we’ll talk about what stop loss is and share 5 powerful stop-loss strategies for traders.
Let’s get trading!

What is Stop Loss?



Stop loss is an automatic order to sell or buy a stock, option, securities, or any financial instrument once its price reaches a specified level (the stop price). Automating this order aims to save traders hours of monitoring and reduce the human element from trading. Stop loss order’s main purpose is to protect you from excessive losses, and it works to ensure all trades end in a win, break-even, or small loss.

Global markets operate round the clock, making it virtually impossible for traders to follow multiple trades on shares, currencies, commodities, etc. Some financial instruments are extremely volatile and usually experience huge price fluctuations in hours or even minutes. Here are the key benefits of stop-loss:

 Protects traders from huge losses
 Automatic exit
 Automated monitoring on multiple trades
 Allows you to decide how much capital to allocate per trade.

5 Powerful Stop Loss Strategies for Traders



Loss is part of the trading game, no matter how skilled or experienced you are. However, there are many ways to reduce or mitigate your risk to keep your losses small. Here are 5 powerful stop loss strategies for traders:

1. Moving Average Exit Strategy

One of the most effective ways to mitigate risk is by exiting the trade on the break of a key moving average support. Moving Averages often act as support. Get out once you lose its support and the price closes it.

2. Loss Percentage Exit Strategy

Another effective stop loss strategy involves exiting the trade using a specified loss percentage on the position capital from the entry point. For example, you can set the maximum price drop percentage to 5% from your entry price. So as soon as it hits 95, you exit the trade.

3. Trade-Off Exit Strategy

In many cases, your stop loss could be a time stop. At this point, you should sell the stock if it doesn’t fluctuate as expected. For instance, if you enter a stock at $150 with a profit target of $170, and the stock is trading for $151, you can choose to exit to free up capital for better opportunities.

4. Relative Strength Index (RSI) Exit Strategy

You could also use the RSI indicator to create a good risk/reward ratio and set your exit level based on risk.

5. Volatility Stop Exit Strategy

Lastly, you can exit the trade if your stock has a major expansion on its daily price range. You could cut your position down in size to reduce the risk, but getting out is a smart move during volatility expansion.

Bottom Line



Trading is a risky business in which loss is inevitable. However, by adopting any of these powerful stop loss strategies, you can mitigate some risks and minimize your losses through a timely exit. After all, traders’ ultimate goal is to gain control over their deals and funds while minimizing risks and maximizing trading potential.

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