Understanding Stop Loss and Limit Orders
First we need to understand what a market order is:
Market Order is an order to buy or sell a stock or other security at the best available price at the time the order is received in the marketplace.
Stop Loss Order:
By layman terms a stop loss (aka stop) is an order that becomes a market order if and when a security sells at or below the specified stop price. It is used to protect oneself against a potential downward slide in a security.
This technique allows an investor to set a limit on the maximum possible loss without setting a limit on the maximum possible gain, and without requiring paying attention to the investment on an ongoing basis.
Stop Limit Order:
A stop limit order is a stop order that becomes a limit order if and when a specified price level has been reached.
Trailing Stops:
The following quotes were taken from InterBank FX website:
“A common mistake among traders is to rely upon a trailing stop as if it were a stop loss. It is important to remember that a trailing stop is not triggered until a trade is positive the amount of pips the trailing stop was set for (+ 1). In other words, a trailing stop set for 15 pips does not become your stop loss until the market has gone at least 16 pips in your favor. If the market were to immediately trend against your position you would have no protection in the form of a stop loss.”
One the features of MetaTrader 4.0 trading platform is the ability to use automatic trailing stops.
How does an automatic trailing stop works?
“Trailing stops are designed to lock in profit levels. Trailing stops literally trail along your increasing profit and adjust your stop loss levels accordingly. A trailing stop set for 15 pips will trigger once a trader’s position is positive at least 16 pips. From this level the trailing stop will adjust pip for pip as your profit level continues to increase. A trader whose trailing stop is set to 15 pips and who is positive 20 pips has protected at least 5 pips of profit. As this trader’s position increases so will their protected profit level.”
Does your computer need to be on for the automatic trailing stop to work?
“Once a trailing stop is triggered a new stop loss is sent from your computer to Interbank FX’s servers. However, for your trailing stop to continue to send updated stop losses to our servers, your computer does need to be up and running. Essentially, if your trailing stop has been triggered you do have a stop loss safely in place. However, if your computer is shut down your stop loss will not continue to trail.”
How to set up a self-moving trailing stop?
“Once your trade has been placed, locate the trade ticket number in your Terminal window. Right click on the ticket number and select the Trailing Stop option. As shown in the picture below, select from the various preset trailing stop levels. A check mark will appear at the level your trailing stop has been set for.”
