Stop loss orders (also referred to as a stop-loss, or stops) is a tool that is used to exit a trade once its movement begins to lose money. Anytime the market starts to move against the trade; the system will automatically knock the trade on the market once the stop loss order price has been reached. To achieve the status of a highly successful trader when day trading futures, traders need to use a stop loss in every one of their trades – without exception. Profitable traders use stop losses for both routine exits and emergency exits to prevent a crash when the market turns heavily against them.
There are two separate correct methods for how to trail a stop loss. The first is more often than not used by discretionary traders when they place it at a price level that the trade is unexpected to reach. The price at which it is placed is often at a level that would make the trader formulate an alternative view of the movement of the market. Hitting that price would automatically make the trader no longer interested in wanting to hold their position. The stop loss works to their benefit by automatically exiting them from a trade they no longer want.
For any discretionary trader, an easy solution to determine the exact price they want to place their stop loss order should be based on market dynamics. Placing it anywhere else will be ineffective at safeguarding the capital used for trades.
The second method of correctly placing a stop loss order when day trading futures is the systems trading approach. Based on the trader’s particular day trading systems “win to loss” and “risk to reward” ratios, he or she would set the stop loss price a specific amount of “ticks” behind the entry price to ensure a minimal loss. Often, traders will use precise mathematical calculations to reach the decision of exactly where to place an effective stop loss order, minimizing their loss to a certain percentage.
System traders should have a test that can immediately identify the exact spot to place a stop loss order. Without this test, they are adding unnecessary risks to every trade, which would work against the reason for using stop loss orders in the first place.
As an alternative to the traditional method of placing stop loss orders in your day trading futures arsenal, traders use indicators. Built into their trading system platform, they can determine if the trade is experiencing a particular indicator pattern. This method does not involve risk to reward or win to loss solutions in its calculations.
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