Online Trading: 5 Timely Moves to Stop Losses
January 6, 2022
Online trading is a complex activity that should be carried out with determination but also with prudence. The latter should also manifest itself through actions that suspend trading activity or interrupt it at the right moment.
When is the right moment? Obviously, when the position has reached the maximum possible profit, to optimize gains; or when the position is at a loss and can no longer be recovered, to contain damages.
These are "ideal" moments, very difficult to identify. However, it is possible to get close. How? Simply by adopting some measures, that is, by putting specific techniques into play. Some are common knowledge, such as stop loss, to the point of being automatically integrated by platforms, accessible in a couple of clicks. Others are less mainstream, more complex, and demanding in terms of commitment.
Incidentally, they all refer to the complex discipline of risk management.
In this article, we present some of these techniques.
Online Trading: When to Stop
Before describing the techniques for suspending trading activity, it is worth clarifying the concept of "stopping at the right point." Well, it is not exclusively a technical issue; it is not simply a matter of using one or two tools. It is also a psychological issue. In short... Stopping is difficult.
It's difficult to stop when you're losing, as you should first "process the grief" of the lost money, and then realize that the position is unrecoverable, assuming it really is. Many tend to delude themselves and believe they can always make it, no matter what.
But it's also difficult to stop even when you're earning. Indeed, it is an unnatural action, and one that is opposed by the natural greed that distinguishes human beings. Recognizing that a position "has given" and that nothing more can be gained from it appears to most as a stretch.
Yet you have to stop. The risk, in the first case, is turning a failed trade (an event that is anything but rare in online trading) into a tragedy. In the second case, turning a winning trade into a failure.
Stop Loss
Let's start with stop loss, which is the most famous risk management technique of all. Very simply, it consists of a forced exit from the position when a given price is reached. The purpose is to contain losses within certain limits, that is, within figures established by the trader himself. The maximum bearable loss for that specific trade is identified, the price at which such loss occurs is derived, and the stop loss is placed precisely at that price.
The advantage of stop loss is that it is really easy to set. In fact, some platforms allow you to do it with a few clicks. Much more difficult is identifying the maximum possible loss. However, it is a good rule that, in the worst-case scenario, this should correspond to 2% of the capital.
Take Profit
The take profit can be defined as the opposite of the stop loss. If the latter has the purpose of containing losses, the take profit has the purpose of preserving profits. In essence, take profit consists of exiting the position when a given price is reached. The price generally coincides with a resistance, that is, with the limit reached at which the asset has ended its propulsive thrust.
There are several take profit levels, just as there are several resistances. This is also because an asset may well exceed a first resistance but stop at the second, or even the third. The further away the resistance set as take profit, the more "courageous" the trader. Obviously, other factors also come into play in the reasoning, which perhaps suggest a healthy trend well beyond the limits suggested by the resistance.
Trailing Stop
The trailing stop is a sort of itinerant, dynamic stop loss. It can be defined as a stop loss that changes as needed. Those who set a stop loss actually identify two levels: one for activation and one for execution. Until the activation level is reached, the trade continues smoothly. When the execution level is reached, the position is abandoned, just as with stop loss or take profit.
Let's imagine an activation at +10% compared to the entry price and an execution price at 5%. As long as the price does not increase to reach 10%, nothing happens. When, however, it has accumulated this percentage, the stop is activated and is executed when the price takes 5%.
The function of the trailing stop is therefore twofold: on the one hand, it limits losses, and on the other, it does not compromise profits. In some ways, therefore, it resembles a fusion between stop loss and take profit.
Shock Protection
The discourse is different for shock protection. Let's be clear, even in this case, we are talking about a forced exit from the position. The activation conditions, however, are independent of the trader's performance. It can be activated both in losing trades and in winning trades.
The conditions, in fact, correspond to the detection of price disturbances. These suggest a condition of danger, uncertainty, and consequently the need for an exit from the trader. Shock protection is rarely set: firstly because it is complicated, secondly because the conditions occur only from time to time.
