Finance & Business
How to place a stop loss order correctly?
A stop-loss order is automatically closed when a certain price is reached, protecting trading capital and preventing losses. Often investors are familiar with the theory of the stop-loss order, but do not know exactly where to place it. To answer the question more precisely, it is necessary to examine the price development of the order. Many traders however, only take the maturity of the order as a guide as to where to place their stop loss mark.
A simple strategy is to place the stop loss mark using simple charts. The swing-high or swing-low movements are good indications for a stop-loss mark. Swing-low or swing-high are markers within a price movement, which is often wave-like. The lowest point of this wave movement is the swing-low marker, and the highest is the swing-high. Using Lows and Highs becomes easier the longer the order is to run, as trend movements are easier to observe in long time frames. However, you can also use this strategy for short positions.
One of the most commonly used methods for setting the stop loss are the support and resistance levels. These indicate the prices at which market participants are willing to buy or sell in the current market situation. If a market situation is analyzed for a longer period of time, it is possible to draw a so-called resistance line. At this level, new buyers enter the market willingly – here it might make sense to place a stop-loss order exactly above the level and take advantage of this effect.
So-called channels or trend lines are also a good way to set stop-loss marks, because once a trend or channel has been confirmed over a longer period of time, the price is highly unlikely to leave this channel for a while. Moving averages are also useful, and can be treated like a trend line. The stop loss should be set just outside the channel or average.