A Stop Out order is the tool that stands on the basis of efficient risk management. It is meant to limit the risk on a trading position in case the market moves against it.
Many traders find it difficult to determine where to place the Stop Out order. On the one hand, they don’t want to set it too far away and lose too much money; on the other hand, if the Stop Order is set too close they might lose money by taking out of their positions too early.
Stop Orders are on the other side of the current price from take-profit orders. If you’re long, your stop order will be to sell, but at a lower price than the current price.
If you’re short, your stop order will be to buy, but at a higher price than the current market price.
The biggest enemy of Stop Out orders is the so-called whipsaws, especially those in both directions. After convincing you to place a trade in the direction of the first spike, the price turns around and takes out your stop-out order.
Keep in mind:
- place your Stop Out order at a level where once the price gets, it negates the hypothesis of your trade;
- once you are in a trade and have established the risk, never fall into the trap of adjusting the Stop Out order to allow for more drawdown;
- a Stop Out order takes the emotion out of trading and protects you from potential steep losses.
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