In trading, an action is needed in every event that is happening. Both for events that are profitable or detrimental to the trader. One of them is an action when it is felt that a loss will occur, traders will usually take action such as stop loss. What is stop loss? This time we will explore stop loss and other things related to trading using stop loss itself.

Stop loss is a term that will describe the limits, to limit the losses that exist and are being experienced by traders or investors, both when buying or selling an instrument that is being traded or invested. For more details about this stop loss, you can read the article below. Before that, don't forget to download the GICTrade forex trading application so you can do a stop loss directly through demo or real-time trading!

Table of Contents

What is Stop Loss?

The definition of Stop Loss is a limit set to restrict the loss that a trader might incur. It is an action to sell a stock at a certain price in order to limit the existing loss. Typically, this stop loss parameter is found at the stop loss level of the respective stock. The stop loss level is an essential trading plan that must be calculated systematically, rather than relying on 'gut feeling'.

This stoploss will be useful to avoid traders who have & store bearish stocks. When bearish, you are not advised to do average down, but cutloss when the price is no longer uptrend. This stoploss level is set at the beginning of the transaction, to be able to anticipate if the stock price does not move up as expected, but will move down.

Generally, prices fall at a faster rate than they rise. That is why stop loss is very important in trading itself. Do not let the profits that have been collected, with a growing portfolio, be eroded in value because there is 1 wrong transaction and the stock price continues to move down. This is where it is important for us to have a stop loss level. In this case, it means that when the price moves not according to the trader's expectations, then it has touched the limit (Stop Loss), then the order that is being carried out will automatically stop. And the trader will receive a loss according to what has been determined as the limit.

Although Stop Loss is designed to limit losses, not all traders will like it. Because by setting the Stop Loss, it means that the trader is at risk of closing the position in a loss when the price is still in a correction. However, it all comes back to each individual. If we have used Stop Loss correctly, then we will not experience a loss when the price is correcting. The key to success in trading is to minimize existing losses.

The way to do a stop loss is to limit the loss so that it is not too big later. For example, you buy ABCD shares for Rp 500. Then you set a stop loss of 10% or Rp 50 below the purchase price of the shares themselves, which is at Rp 450. Thus, when the price falls, you only experience a maximum loss of up to 10%.

How to Set Stop Loss in MetaTrader

Doing and installing the stop loss itself on the metatrader 4 android platform can be done quite easily, not much different when you install metatrader 4 on your PC. How to install a stop loss on metatrader is:

  1. Please open the MetaTrader 4 application on your Android, then select one of the pairs that will be traded later.
  2. Touch the screen so that the trading menu appears on your metatrader, then select "New Order"
  3. Next will appear on a new screen that will display the price movement. On the MT4 android, the red line is the selling price or sell while the blue line is the price to buy or Buy.
  4. If you want to make a "Sell" order, then you can place Stop Loss above the red line. Likewise, if you want to make a "Buy" order, then place Stop Loss below the blue line.
  5. If the price you entered is correct, the message "order has been placed in queue" will appear along with the Stop Loss value level that you have set.

If you want to change the stop loss value after making a transaction, then you just click on the currency pair that has been opened or open position, then select change, then a window will appear to change the stop loss value. To maintain security so as not to make a mistake and will result in a loss, you should learn first by using a demo account. With this account you can memorize the functions on the android metatrader first. Before continuing to discuss how to determine stop loss, you can do a Preliminary Test to find out how far your trading talent has understood so far.

 

How to Determine Stop Loss

There are several ways that you can use to determine stop loss and take profit, including:

Using the Risk and Reward Ratio calculation

Example to calculate the risk & reward ratio, the stop loss level that is ready to be accepted is 50 pips, then by using a ratio of 1:2, the take profit level that will be determined is 100 pips. The risk & reward ratio in this trading is one part of Money Management in trading.

The first thing you should do before setting up the trading strategy is to calculate the risk you are ready to accept so that the trading results are realistic. In other words, the first thing you should do is determine the stop loss level first, after that determine the take profit that is in accordance with the risk & reward ratio that has been planned previously.

Another method you can use to determine a stop loss is through money management, specifically by calculating risk and reward using percentages. In the simplest theory of Money Management, it is stated that traders should not risk more than 2-3% of their capital. Therefore, the stop loss should be placed at this percentage level. Additionally, this will also affect the size of the lot used.

For example, if you have an equity of $1000, with a risk tolerance of 3%, the calculation would be: $1000 x 3% = $30. This means that in one trade, the maximum loss you can accept is $30. By using a 0.10 lot size, the calculation would be $30 ÷ 0.10, resulting in 300 points or 30 pips as the stop loss limit to be placed.

Using Price Action

The second way that you can use in determining stop loss and take profit is by determining a stop loss level and also take profit based on the price action pattern that is happening on the chart. Determining a stop loss and take profit using support and resistance
  1. Calculate the distance for the estimated order position with the support or resistance level,
  2. Determine the use of lots and also risk management according to the distance between the order position and the stop loss line at support or resistance,
  3. If the support line acts as a stop loss level, then the nearest resistance level will be the place to place the take profit.
  4. Likewise, if the resistance line has acted as a stop loss level, then the nearest support level will be a place to place take profit.
Determining a stop loss and take profit using trend lines
  1. Calculate the distance for the estimated order position with the trendline,
  2. Determine the use of lots and risk management according to the distance between the order position and the stop loss line on the trendline,
  3. Take profit can also be placed at the nearest support or resistance opposite the stop loss level itself.
Determining stop loss and take profit using Fibonacci retracement
  1. Project the Fibonacci level lines as stop loss levels and also take profit levels.
  2. Determine the use of IoT and risk management according to the distance between the order position and the Fibonacci retracement level line.

Benefits of Placing a Stop Loss

As the definition, the advantage of installing a stop loss is that it is determined to limit a loss. When a price movement touches this value, the system will automatically close the order or position. Because by using this stop loss installation, traders will be able to limit unwanted losses themselves, if there is a loss that is too deep, then the trader can limit the losses that have been determined. Therefore, determining this stop loss becomes much more important when compared to determining the profit target. How to determine the ideal Stop Loss, there are several correct uses of stop loss, the correct use of stop loss is:
  1. Stop loss using an indicator
  2. Stop loss using a support or resistance line
  3. Stop loss using a Trend Line

However, ideally it can also be done by using a method to determine stop loss or loss limits. Depending on the trading system to be used. Usually stop loss is also called close point and far point. For example, when we take a sell when the support breaks, we can place a stop loss at a far point, namely by placing a stop loss at several points above the resistance level. After knowing about the advantages of setting a stop loss itself, you can fill out the GIC internal survey so that we can find out which performance needs to be improved!

 

Difference between Stop Loss and Cut Loss

The difference between stop loss and cut loss is in terms of how much loss you will receive and how to do Cut Loss and Stop Loss itself. Cut Loss can be done if you are wrong in doing what is called open position or wrong in doing analysis so that it will result in a loss.

Many traders do this Cut Loss to save the existing margin so that with the Cut Loss, you will avoid a fairly large loss. While in its mechanism, cut loss itself can be done manually, namely by cutting the position or clearing the position when you are experiencing a loss without having to wait for the price to touch the Stop Loss first.

So that the losses that will be caused will not be too big and you can open a position again. As for Stop Loss itself, it can be used for you after opening a position first because it will be useful for minimizing losses in the transactions you make.

The method for using a Stop Loss can be done manually by setting the Stop Loss according to your previous open position. The rule is:

  • If you have an open Sell position, you should place the Stop Loss above the opening price or the current price level.
  • If you have an open Buy position, you should place the Stop Loss below the opening price or the current price level.

The mechanism works by automatically cutting the position when the price reaches or exceeds the Stop Loss you’ve set. This helps to limit your losses if the market moves against your position.

Related Topics

Here are some questions that traders usually ask regarding take profit itself.

Take Profit is

Take profit, as quoted from the Indonesian Stock Exchange's capital market school book, is the action of selling shares that are owned or have been purchased after reaching a planned or desired price or target level. Determining the position to take profit usually depends on whether you are a trader or an investor, as it is related to the time frame.

A trader can enter/buy shares in the morning, and will sell them in the afternoon before the stock exchange closes, so the profit target will usually be lower when compared to investors. Investors usually buy shares for a longer period of time, such as half a year, a year, or even years. In general, this profit taking can be interpreted as an action to sell shares that are owned or that have been purchased, after reaching the planned price level or target.

So this action can help investors reduce the risk of volatility in stock prices. Referring to the investopedia page, Sunday (10/31/2021), this profit taking can be determined and re-evaluated during the holding period of an investment. The initial profit target that can be made when trading is first carried out. This will depend on whether someone is a trader or an investor.

How to Set Take Profit in MetaTrader

  1. If you have opened a buy position, the next step is to draw a flat line above the order or by placing a line at the point you want, then click as shown in the picture.

 
2. Next, copy the number that has been generated by the horizontal line, by long pressing on the number then clicking copy.
 

 
3. Then, go to the order menu that has been installed with SL and do the same thing, namely editing the order, by sliding and pressing the pencil icon.
 

 
4. Then paste the numbers from the Take-profit flat line that you copied earlier into the form on the right or in the green one. After that, click "change". Then the Take-profit will be installed and solid when viewed on the chart with the words TP.
 

 
After learning about stop loss itself along with all the related things and also related questions, you can apply the methods that have been explained to the trading that you are currently doing. Or if you are still learning and want to consult about trading itself, you can fill out the Trader Assessment and consult your trading with GIC!

Also learn about stop loss or other terms in the big trading dictionary by going through several cases that have been done in real time or you can also try it through a demo account. You can also learn through cases that are currently on the internet. If you have learned it, invite your friends to join GIC or become an IB to get additional income other than through trading!