What is a Gold Trading Stop Loss Order? and Factors to Consider When Setting Stop Losses

Stop Loss is a type of XAUUSD trading order placed after opening a Gold trade that is meant to cut losses if the market moves against you.It is a predetermined point of exiting a losing transaction & it's meant to control losses in trading.

A stop loss is an order placed with your online broker that will automatically close-out your trade transaction when the Gold price reaches and gets to a predetermined price. When the set level is reached, your open transaction is liquidated so as to cut your trading losses.

These stop loss orders are designed to limit the amount of money that a trader can lose: by exiting the transaction if a specific price that's against the trade transaction is reached.

For illustration, one might buy XAUUSD at 1200.50, & place a stop loss at 1200.00. If the XAUUSD Gold price moves against you & reaches 1200.00, the stop loss order will be filled & the trade position will be closed therefore limiting the loss to 50 points (pips).

Regardless of what you might be told by other traders, there's no question about it whether these orders should or should not be used - they should always be used.

One of the most difficult things in Gold metal trading is setting these stop loss orders. Put the stop loss too close to your entry price & you are liable to exit the trade transaction due to and because of random price volatility. Place it too far away and if you are on the wrong side of the trend, then a small loss could turn in to a large one.

Critics will point out several disadvantages of these orders; that by placing them you are guaranteeing that should your open trade move in the wrong direction, you'll end up selling at lower prices, not higher.

The skeptics also will argue that in setting stoplosses you are vulnerable to exit a transaction just before the market heads in your favor. Most investors have had the experience of setting these orders & then seeing the price retrace to that level, or just few points below it, & then go in the direction of their original and initial price trend analysis. What might have been a profitable position and trade instead turns in to a loss.

Experienced traders always use stop loss orders as they are a crucial part of the discipline required to succeed because they can limit a small loss from becoming a large one. What's more, by diligently setting these stop loss orders whenever you enter a trade, you end up making this important decision at the point in time when you are most objective about what is really happening with the XAUUSD market, this is because the most objective trading analysis is done prior to opening a transaction. After entering the market an investor tends to analyze the market differently because they now have a bias towards one side, the direction of their analysis.

Unexpected news can come out of the blue & dramatically affect the XAUUSD Gold price: this is why it is so crucial to have a stop loss. Its best to cut trading losses early when a trade is going against you, it is best to cut your trading losses immediately instead of waiting for it to become a big one. Again, if you set your stops when you're entering a trade, then that is when you are most objective.

A key question is precisely where to place this order. In other words, how far should you as a trader place this below your purchase price? Many traders will tell you to set a predetermined - maximum acceptable loss, an amount based on your equity balance rather than use technical indicators of the Gold pair in question.

Professional money managers advice that you should not lose more than 2% of your equity on any 1 single Gold trade transaction. If you've got $50,000 in capital, then that would mean that the maximum loss that you should set for any one trade transaction is $1,000 dollars.

If you bought 10 standard lots of a XAUUSD pair, then you'd limit your risk to no more than $1,000 dollars. In that case you would set your stop loss at 100 pips (points) & would have $49,000 left if you exited the trade position at the maximum loss allowed. The topic of equity management and risk management is wide and it is covered & discussed/explained under equity management topics.

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What to Consider When Setting Stop Losses

The most important question is how close or how far this order should be from the price where you entered the trade transaction position. Where you set will depend on several different factors:

Since there are no rules set in stone as to where you should set these stop loss levels on a XAUUSD price chart, we follow general guidelines used to help place these stop loss orders correctly.

Some of the general guide-lines used are:1. Risk - How much is a trader willing to lose on one trade transaction? The general rule is that a xauusd trader should never lose more than 2 percent of the total account capital on any one single Gold transaction.

2. Volatility - this refers to the daily price range of the XAUSUD pair. If the XAUUSD pair routinely moves up & down in a range of 100 pips or more over the course of the trading day, then you as a trader can not set a tight stop loss order. If you do, you'll be taken out of your trade position by the normal market volatility.

3. Risk:Reward ratio - this is the measure and estimate of potential risk to reward. If the market factors and conditions are favorable then it is possible to comfortably give your position more room. However, if the market is too range-bound it then becomes very risky to open a trade without a tight stop, then don't make the trade transaction at all. The risk : reward is not in your favor & even setting tight stop loss orders will not guarantee profitable results. It'd be wiser to look for a better trade position to trade next time.

4. Position size - if the position size opened is too large then even the smallest decimal price movement will be fairly big in percentage terms. This means that you have to set a tight stop which might be taken out more easily. In most cases it's better to adjust to a smaller position size so as to give your Gold trade more space for fluctuation, by setting a reasonable level for this stop loss while at the same time reducing/decreasing the risk.

5. Account Capital - If your account is under-capitalized then you'll not be able to set your stop loss orders accordingly, because you will have a large amount of money on a single position that will force you to set very tight stop loss orders. If this is the case, you should think seriously about whether you've got enough capital to trade XAUUSD in the first place.

6. Market conditions - If the price is trending upward, a tight stop loss may not be necessary. If on the other hand the price is choppy and there is no clear direction then you should set a tight stop loss or not open any transactions/positions at all.

7. Chart Time Frame - the bigger and larger the chart time-frame you use to trade Gold, the bigger and larger the stop loss set should be. If you were a scalper your stop loss orders would be tighter than if you were a day trader or a swing trader. This is because if you are using longer chart time frames to trade & you determine the price will be moving up it does not make sense to set a very tight stop loss because if the XAUUSD Gold price swings a little your stop loss will be hit.

The method of setting stop losses that you select will mainly depend on what type of XAUUSD trader you are. Most frequent used method to determine where to set stop losses is - resistance and support levels. These levels give good points for setting these stop loss orders as they are the most reliable, because the support & resistance areas will not be hit many times.

The method of how to set these stops that you choose should also follow the rules above, even if not all those that apply to your XAUUSD trading strategy.

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What is a Gold Trading Stop Loss Order? and Factors to Consider When Setting Stop Losses

What to Consider When Setting Stop Losses