Stop Loss Order Trading Summary: Points To Remember When Setting

The key to setting stop losses in indices trading is not to set too tight or too far & not exactly on the support or resistance areas.

A few pips below the support or above the resistance levels is the best place.

If you are going long (buying a indices trading instrument), just look for a nearby support level that is below your entry point and set this order about 10 pips to 20 pips below that support level. The example explained and illustrated below show the level where a trader can set up their stops just below the support level on a chart.

Support Level for Setting Stop-Loss Order Level for Buy Trade

If you are going short (selling a indices trading instrument), just look for a nearby resistance level that is above your entry point and set this order about 10 pips to 20 pips above that resistance level. The example explained and illustrated below show the level where a trader can set up their stops just above the resistance level on a chart.

Resistance Level for Setting Stop-Loss Order Level for Sell Trade

You can also use stop loss stock indices orders to lock in profits, Not Just for Preventing Losses

The advantage of a stop loss stock indices order is that you do not have to monitor on a daily basis how the stock indices market is performing. This is especially handy when you are in a situation that prevents you from watching your trades for an extended period of time, or when you want to navigate to sleep after trading the whole day.

The disadvantage is that the price at which you set these orders could be activated by a short-term fluctuation in price. The key is picking a stop-loss percentage that allows price to fluctuate within the day to day range while preventing the downside risks.

These stock indices orders are traditionally thought of as a way to prevent losses thus the name. Another use of these orders is to lock in profits, in which case it is referred to as a trailing stop loss.

For a trailing stop-loss order it is set at a percentage level below the current market price. This trailing level then adjusted as the trade unfolds. Using a trailing level allows you to let profits run while at the same time ensures that should the stock indices trading market turn you will have locked in some of your profits.

These stock indices orders can also be used to eliminate risk if a Indices trade becomes profitable. If a trade makes some reasonable gains then the stop can be moved to break even point, the point at which you bought, thereby ensuring that even if the trade moves against you, you will not make any loss, you'll break even on that trade.

Trailing stop stock indices orders are used to maximize and protect profit as price rises and limit losses when the price falls.

A good example is when you use the parabolic SAR Indicator & keep moving your stop loss to the parabolic SAR level.

Parabolic SAR Indicator for Setting Trailing Stop Loss Order in Indices

Another example is where a trader moves his stop by a certain number of pips after every few hours or after every hour or after every 15 min depending on the Indices chart timeframe that the trader is using.

In the stock indices trading example above the parabolic SAR which had a setting of 2 and 0.02 was used as the trailing stop for the above chart. The trader would have kept moving the trailing stop level upwards after every SAR was drawn until the time when the Parabolic SAR was hit and the indices trend reversed.

ConclusionA stop-loss order is a simple tool, yet so many investors fail to use it. Whether it is used to prevent excessive losses or to lock in profits, nearly all investing styles can benefit from this trading tool.

Points To Remember When Setting These Orders

Here are some important points to remember:

• Be careful with the points where you set these orders. If indices normally fluctuates 50 points, you do not want to set your order too close to that range else you will be taken out by normal market volatility

• Stop Loss Orders take the emotion out of a trading decisions & by setting one you set predetermined point of exiting a losing trade, meant to control losses.

• Traders can always use indicators to calculate where to set these levels, or use the concepts of Resistance and Support to determine where to set these orders. Another good indicator used to set these orders is the Bollinger bands where traders use the upper and lower band as the limits of price therefore setting these orders outside the bands.