What's a Stop Loss Order? and Factors to Consider When Setting

Stop Loss Order is a type of order that's set after opening a trade that's intended to cut losses if the xauusd market trend moves against you.

It's a preplanned level of getting out of a losing trade transaction and it's intended to control losses.

A stop loss is an order placed with your trading broker that will automatically close your trade transaction when it reaches a predetermined price. When the set level is reached, your open trade is liquidated.

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

Regardless of what you might be told by others, there is no question about whether these trading orders should or shouldn't be used - they should always be used.

One of the more troublesome things in in Gold is setting these orders. Put the stop loss too close to your entry trading price & you are liable to exit the trade transaction due to random market price volatility. Put it-toothe-stop-loss-order-too far away and if your'e on the opposite side of the trend, then a small loss might turn into a large one.

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

Skeptics will also argue that in setting stops you are vulnerable to exit a transaction just before the xauusd market moves in your favor. Most investors have had the experience of setting a these orders and then seeing the xauusd trading price retrace to that level, or just below it, & then go in the direction of their original market trend analysis. What may have been a profitable trade position now instead turns into a loss trade.

Experienced traders always use stop 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 purposefully putting these orders whenever you enter a trade position, you end up making this crucial decision at the moment in time when you're most unbiased about what is really happening with the xauusd market, this is because the most objective technical analysis is done before opening a trade transaction. After opening the xauusd market one will tend to interpret the xauusd market differently because now they have a bias toward one-sidea-particular-side, the direction of their analysis.

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

A key question is exactly where to place this order. In other words, how far should you place this below your purchase xauusd trading price? Many traders will tell you to set a pre-determined - max acceptable loss, an amount that is based on your account balance rather than use technical xauusd technical trading indicators.

Professional money managers state that you shouldn't lose more than 2% of your account equity on any one trade. If you have $50,000 in capital, then that would mean maximum loss you should set for any single trade is $1,000.

If you opened a trade, then you would cap your trading risk to no more than $1,000. In which case you would put your stop order at the number of pips that are equal to $1000 & would have $49,000 left in your account if you closed the trade transaction at the maximum loss allowed. The topic of Gold risk management is wide & it is covered in the money management topics.

• Gold Money Management Introduction
• Gold Money Management Strategies Methods

Factors to Consider When Setting

Most important question is how close or how far this order should be from the xauusd trading price where you entered the position. Where you set will depend on several factors:

Since there aren't any rules cast in stone as to where you should put these zones on a chart, we follow general rules which are used to help set these levels correctly.

Some of the general guidelines used are:

1. Risk - How much is one willing to lose on one transaction. The general rule is that a trader should never lose more than 2 percent of the total account capital on any one transaction.

2. Volatility - this refers to the daily trading price range. If gold regularly moves up and down in a range of 100 pips or more over the course of the day, then you can't put a tight stop order. If you do, you'll be taken out of the trade transaction by the normal market volatility.

3. Risk to reward ratio - this is the measure of potential reward to risk. If the xauusd market conditions are favorable then it is possible to comfortably give your trade more space. However, if the xauusd market is too choppy it then becomes too risky to open a transaction without a tight stop then don't make the trade at all. The risk to reward isn't in your favor and even placing tight stop loss orders will not guarantee profitable results. It would be more wiser to look for a much better trade transaction next time.

4. Position size - if the position size opened is too big then even the smallest decimal xauusd price movement will be fairly large in % terms. This means that you've to put a tight stop loss which might be taken out more easily. In many cases it's better to shift to a smaller trade transaction size so-as-tosothat-to give your trade transaction more room for fluctuation, by putting a rational level for this order while at same time capping the risk.

5. Account Capital - If your account is under-capitalized then you will not be able to set your stops accordingly, because you'll have a big amount of money in a single trade transaction which will obligate you to put very close stops. If this is the scenario, you should consider very seriously about whether you have sufficient capital to trade XAUUSD in the first place.

6. Market conditions - If the xauusd trading price is trending upwards, a tight stop might not be necessary. If on the other hand the xauusd trading price is choppy and has no clear market trend direction then you should use a tight stop loss or not execute any transactions at all.

7. Chart Time Frame - the bigger the chart timeframe you use, the bigger the stop should be. If you were a scalping your stops would be tighter than if you were a day or a swing trader. This is because if you're using longer trading chart timeframes & you figure out the xauusd trading price will be move upwards it doesn't make any sense to put a very closetight stop loss because if the xauusd trading price swings just a little, your order will be hit.

The method of setting that you select will mostly depend on what type of trader you're. The most commonly used technique to determine where to set is - resistance and support zones. These zones give good areas for placing these orders as they are most reliable, because the support and resistance zones will not be hittaken-out many times.

The technique of how to set these stops that you select should also adhere to the guidelines above, even if not all those who apply to your trading strategy.