What is a Stop-Loss Level?
Stop-losses are a type of order that is geared towards preserving your invested funds by limiting your losses to a fixed amount. There are different ways of thinking about stop-losses: in percentage terms, ticks, pips, or basis points. On Morpher, both stop-loss and take-profit levels are expressed in terms of price. This means that the stop-loss level is defined as the market price at which your position will be closed as a loss.
You can think of a stop-loss as a safety net for your trades, a feature made specifically for minimising your potential losses, limiting them to the level set by you.
Some traders refer to stop loss and take profit levels as "protective stops".
Where should I set my stop-loss level?
If you’re trading long, with a buy order, that means your position will lose value if the underlying market decreases in price. You should set your stop-loss level at a price that is less than the trade price.
If you’re going short, with a sell order, your position’s value will decrease if the underlying market increases in price (the opposite of a long position). Therefore, your stop-loss should be set above the trade price.
It’s important to understand that the price, at which your stop-loss or take-profit order is executed, can vary from the price that you have set. Markets move quickly, and while your stop order is triggered by the underlying market crossing the price threshold that you have set, by the time the order is created and placed (usually within a few seconds), the market might move, and your order will close at a different price.
Market Price Gaps
You may notice that sometimes markets jump in large increments. This can occur when there is increased market volatility, or if the market opens after a session break. If that happens, and the market moves over or under the price level that you have set, it will trigger the closure of your position at the current market price.
You should stay mindful of spreads as they will affect the efficacy of using stop-loss and take-profit orders as a risk management tool. The price thresholds set on trades are linked to the market price, before any spread calculation. Therefore, make sure you set your price thresholds with spreads in mind.
Updated on: 24/03/2021