Money and risk management in online trading is everything. Stop loss and trailing stop orders are some of the tools traders use to manage their risk and cut their losses as soon as possible, in order to make money trading online. No matter the security one trades, the stop loss order is necessary when the prediction is wrong while the trailing stop loss is usually placed to exit the market when the trade is already profitable.
Stop loss order in stock trading
Traders who bought SPY stock yesterday or are looking to buy today after the price bounced at the support level will most likely submit a stop loss order exactly below that specific support level. If the stock price of the ETF fails to resume the uptrend and collapses, the stop loss order will automatically be transmitted as soon as $142.50 is hit, minimizing the risk.
Stop loss order in forex trading
Forex traders who went long EUR/USD the previous week at 1.2930, may have submitted a stop loss order at 1.28. Should the currency pair plunge below the most recent support level, their maximum risk is restricted to 130 pips in this specific forex trading.
Stop loss order in Betfair trading
Surprised to read about Betfair trading? Sports trading is a popular form of online trading and Betfair trading is quite similar to online stock trading. What is stop loss in Betfair trading? Since there is risk involved in this kind of trading online, stop loss orders have an immediate effect on one’s profitability. The ever popular betting market of US Presidential election provides a fine example of using stop loss orders in Betfair trading. Traders who trust an Obama win in the next election, should have set a stop loss at the 60% support level of the implied chance percentage. In other words, if you have bet on Obama at 1.50 (decimal odds) or lower, you should trade out if the odds climb above 1.67, managing your risk with a stop loss. Another usage of stop loss is in betting against Manchester City to win this year’s English Premier League. Those who bet against (lay) Manchester City at 2.80, should cut their losses in case the odds reverse their trend and fall below 2.60.
What is trailing stop loss orders? These kind of orders are usually stop loss orders that traders move up, as their prediction is confirmed and prices climb. For instance, in the SPY stock chart above, the stop loss order will be moved up at breakeven point, if SPY rises to $146 for a risk-free trade. If it continues climbing above the resistance level at $148, traders will lock profits by further moving the stop loss order up, protecting their profits in case the stock reverses. Likewise, forex traders will move the stop loss from 1.28 closely to the EUR/USD price, should Euro continues rising and sports traders will follow up as Obama’s chance to win the election is improved or Manchester City’s odds keep on drifting. Effectively the stop loss orders are converted into trailing stop loss orders, as soon as they are moved up to at least the breakeven point.
Trailing stop orders are commonly used to protect profits, unless the price hits the profit target. Profit targets can be set at recent resistance levels, at Fibonacci extensions or anywhere traders think it’s the fair price of the traded security.