Different Forms of Stops in Trading
Stops are one of the important element for traders' success, however, it is often overlooked and even neglected by newer traders. The immediate effect of stops is not easily identified, but it goes a long way to helping traders build a solid trading trading plan, be emotionally stable and gaining confidence in trading.
Everyone should use some form of stops, and do not be mistaken, stops does not always mean setting a hard Stop Loss (SL) level on the chart.
Personally, I do not enter the market with a hard SL level. You will seldom see me placing SL in my trades. [Side note: You can get my trading signal here]
I uses a different approach to stop and I will explain the different stops that one can utilise in their trading business.
Different Forms of Stops aka SL
What are Stops?
Stops aka SL is a capital protection mechanism that assist traders to limit their potential losses in the market by pre-defining a Stop level and the maximum loss amount. Stops can be executed automatically or manually and each has their pros and cons.
Stops in Different Forms
There are different forms of Stops, they can be executed either automatically or manually, and they can be differentiate by the followings,
Price Level Stops
1. Dollar Stops
Dollar Stops is a stop that is define by the amount of losses that one can take. For example, you only want to lose a maximum of $5,000 for this trade, so you can calculate the price changes per pip and calculate the price level you would execute your exit.
Even though such stops would in the end utilise pips and price level, it is different because it would be primarily based on the amount of losses that one can take.
2. Time Stops
Time stops is a form of stops that is define by the length of time that the trade has been placed by the trader.
Time stops are seldom the primary factor that traders used when considering their exit. But it is usually a factor for Hybrid Stops. I take into consideration of the time element as well for my stops.
3. Pips Stops
Pips Stops is a stops that is define by the amount of pips losses a trader can endure before exiting the trade. Slippages must be considered when using Pips Stops as the primary SL consideration.
It is a popular form of stops that traders used and often having higher weightage when compared to Dollar Stops.
Personally I use less of Pips Stops as I find it to have a higher degree of unreliability.
4. Price Level Stops
Price Level Stops are based on price level that when reached, the trade placed will exit.
This form of exit can be popular amongst both technical and fundamental traders as certain price levels usually mean strength or weakness of the pair.
5. Technical Stops
Technical Stops are exits based on certain readings or technical levels of the indicators used.
Technical Traders usually used this form of thinking when planning both entries and exits. Some are aware of such thinking behaviour, some don't.
6. Hybrid Stops
As the name suggests, it is a form of SL that utilises two or more forms of exit mentioned from point 1 to 5.
Eample 1: you can based your exit with such rules, $5,000 maximum loss or 50 pips losses, whichever come first.
Example 2: you want to have a maximum loss of $5000, but you are only entering 1 contract, you can have a maximum Pips Loss of 500.
Example 3: You wanted to enter long for EURUSD @ 1.31235, the next price level if broken will signify a failed reversal. The price level is seen to be 1.30235, which is a potential loss of 100 pip. With that consideration, you can bear a maximum loss of $5,000 and you being a day trader, you want to exit before the end of day, which is 6 hours from now. So you entered 2.5 Long contracts for EURUSD @ 1.31235, and you will exit if price hit 1.30235 or if you reach a loss of 100 pips or if 6 hours is up. You can also readjust your entry to 5 contracts, which will result in $5,000 dollar loss if 1.30235 is being hit, and exit by end of 6 hours.
We can either use the line of and / or reasoning, or we can combine them to come out with a Stop Loss level. Example 3 is a very realistic example of our decision making.
There is no one right way or best way to manage our SL. However knowing and understanding the minute differences between them can help us understand what to do when facing different conditions.
In reality, many of us uses a Hybrid Stops, just that we might prescribe different weightage to each form thus having a primary stop which we can pinpoint to for our SL decision making.
In my next blog post, I will share my personal experience on Stop Losses. I will also share on my experience of executing SL manually and automatically.