Day Trading Stop Loss Explained
A day trading stop loss is an order that closes your trade if price moves against you by a set amount. This guide explains how…
A day trading stop loss is an order that closes your trade if price moves against you by a set amount. This guide explains how it works, where to place it and how to size your trade around it.
What a Stop Loss Is
A stop loss is an order you add to a trade. It tells your platform to close the trade at a price you choose. You set this price before the loss happens.
Where you place it depends on the direction of your trade:
- On a buy trade, you make money if price goes up. Your stop loss sits below your entry price.
- On a sell trade, you make money if price goes down. Your stop loss sits above your entry price.
If price never reaches your stop loss, the order does nothing. Your trade stays open until you close it or it hits your profit target.
Why a Day Trading Stop Loss Matters
Day trading moves fast. Prices can change a lot within minutes. A stop loss gives each trade a planned exit if you are wrong.
It Sets Your Loss Before You Enter
With a stop loss, you know your planned loss before you open the trade. You can then decide if that loss fits your plan. Without one, you only find out your loss after it happens.
It Protects Your Account From One Trade
One trade without a stop loss can keep losing. It can take a large part of your account in a short time. A stop loss closes the trade at your chosen level instead.
It Works When You Are Away
You cannot watch the screen every second. You may lose your internet connection. You may need to step away. A stop loss sits on the trade and can close it while you are gone.
How a Stop Loss Order Fills
A stop loss does not work like a wall that price cannot pass. It is an order with two parts. Knowing both parts helps you set fair expectations.
Step 1: Price Reaches Your Level
Your stop loss waits at the price you set. When the market reaches that price, the order triggers.
Step 2: The Trade Closes at the Next Price
Once triggered, the order closes your trade at the next price the market offers. In calm markets, the gap between this price and your stop loss is small.
Slippage: When the Fill Is Worse
In fast markets, price can jump past your stop loss. Your trade then closes at the next available price. That price can be worse than the one you set. This gap is called slippage.
A standard stop loss does not promise an exact exit price. Your loss on a trade can be larger than you planned. Keep this in mind when you decide how much to risk.
Ways to Place a Stop Loss
There is no single correct place for a stop loss. The goal is to place it where your trade idea is proven wrong. Here are three methods to choose from.
Based on the Chart
This method uses recent highs and lows on your chart.
- On a buy trade, place the stop loss a little below a recent low.
- On a sell trade, place the stop loss a little above a recent high.
The idea is this: if price breaks that level, the reason for your trade no longer holds. Leave a small gap past the level, so small moves do not close your trade.
Based on How Far Price Moves
Every market moves a certain amount in a normal hour or day. A calm market moves a little. A busy market moves a lot.
The average true range, or ATR, is a tool that measures this. It shows the average distance price has moved over a set number of candles. Look for it in your platform’s list of indicators.
You can place your stop loss a set number of ATRs away from your entry. When the market is busy, your stop loss sits further away. When the market is calm, it sits closer.
A Fixed Distance
Some traders use the same stop loss distance on every trade. For example, they always place it 20 points away. This is easy to follow.
The weak point is that it ignores the chart. A 20-point stop loss may be wide on a calm day. On a busy day, normal price moves may hit it within minutes.
How to Size a Trade Around Your Stop
Your stop loss and your trade size work together. Set the stop loss first. Then choose a trade size that keeps your loss inside your plan.
Follow these three steps:
- Choose your risk amount. Decide how much money you are willing to lose on this one trade.
- Measure your stop distance. Count how far your stop loss is from your entry price.
- Work out your trade size. Divide your risk amount by the loss per unit at your stop loss.
A Worked Example
This example uses made-up numbers. Check the contract details on your own platform before you trade.
- You decide to risk $100 on a trade.
- Your stop loss is 25 points from your entry.
- One unit of the CFD gains or loses $1 for each point price moves.
- At your stop loss, each unit loses $25.
- $100 divided by $25 equals 4 units.
You trade 4 units. If your stop loss fills at your price, you lose $100. If slippage happens, the loss can be larger.
Notice the order. The chart set the stop loss. The stop loss and your risk amount then set the trade size.
What a Trailing Stop Loss Does
A trailing stop loss moves with price when the trade goes your way. It keeps the same distance behind price as it rises on a buy trade. On a sell trade, it follows price down.
When price moves against you, the trailing stop loss stays where it is. It never moves back. If price reaches it, the trade closes.
When It Helps
A trailing stop loss can lock in part of a gain. If a trade moves well in your favour, the stop loss follows. A later turn in price then closes the trade with some gain kept.
When It Hurts
Prices rarely move in a straight line. A trailing stop loss set too close can close a good trade during a small pullback. Price may then continue in your direction without you.
Stop Loss Mistakes to Avoid
Moving the Stop Further Away
Price nears your stop loss, and you move it further away to avoid the loss. This turns a planned loss into a larger, unplanned one. Once a trade is open, only move your stop loss to reduce risk, never to add to it.
Placing It Too Close
A stop loss that is very close to your entry can be hit by normal price moves. Your trade idea may still be right. Use the chart or the ATR to give the trade enough room.
Trading With No Stop Loss
Without a stop loss, nothing limits your loss on a trade except you. In a fast market, there may be no time to react. Place your stop loss when you open the trade.
Choosing Trade Size First
Some traders pick a trade size, then squeeze the stop loss to fit their budget. This puts the stop loss in a place the chart does not support. Set the stop loss first, then size the trade.
Using a Stop Loss on a Funded Account
A funded account is a trading account where a prop firm provides the trading capital. FXIFY offers funded forex and CFD accounts. Each FXIFY program has its own loss limits.
A stop loss helps you keep each trade inside your own plan. A planned loss per trade also makes it easier to stay inside the account’s loss limits. Read the rules for your program on the FXIFY programs page before you trade.
FAQ
Does a Stop Loss Always Close at My Price?
No. A stop loss triggers at your price, then closes at the next available price. In fast markets, slippage can make the fill worse than your stop loss price.
Do I Need a Stop Loss on Every Day Trade?
A stop loss sets a planned exit on each trade. Without one, your loss has no set limit. Placing a stop loss on every trade keeps your risk known before you enter.
Should I Ever Move My Stop Loss?
You can move it to reduce risk. For example, you may move it closer once a trade moves in your favour. Do not move it further away to avoid a loss.
Where Is the Right Place for a Stop Loss?
Place it where your trade idea is proven wrong. This guide covers two ways to find it: recent highs and lows, or the ATR.
