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Stop Loss - Everything You Need To Know About Defensive Orders

Stop Loss - Everything You Need To Know About Defensive Orders

created Paweł MosionekDecember 7, 2017

Stop Loss, the most popular pending order among Forex traders. Its task is very simple - to limit our losses. But is its modus operandi as simple? Have you heard about "Performance guarantees" i "Cleaning SL-i"? Do you know everything about Stop Loss? Let's find out.

Execution of Stop Loss orders

Have you added a Stop Loss order to your position? Great, but do you know how the broker will do it? Many beginner traders start their trading with the belief that SL is a magic mechanism that will absolutely close their position, protecting them from heavy losses. And it is, but only partially.

All pending orders - SL, TP, Buy / Sell, Stop / Limit - are orders stored on the broker's server side. This means that after setting them, we can turn off the platform, and it will take effect anyway. Only that, de facto, their implementation takes place on an arm's length basis. In other words, they are limit orders. price * we set After reaching or exceeding the indicated level, the pending order is transferred for execution. As a result of a quick price change or a quotation gap, it may happen that our Stop Loss will be executed at a price different than expected. As a consequence, our loss will be higher than we assumed at the beginning - we will include the so-called price slippage.

* The price we set is different activation priceand not the implementation of the order.

Guaranteed SL - is it?

Stop Loss: Guarantee

You can find offers from brokers who mention the Stop Loss order guarantee. These guarantees have two faces, and in addition are often subject to certain conditions that must be met. It may turn out to be the first transaction that you have been fooled into the usual marketing gimmick. But to the point.

# 1 - Performance guarantee

This is the first of the types of warranty that you can meet and which is relatively popular.

The performance guarantee in this case only means that the broker declares that your order will be closed, i.e. that the SL order will be executed and will not leave you with an open position - does not do favor, does it? 🙂 It does not mention, however, whether this will happen at the price you have indicated.

# 2 - Execution price guarantee

And thus it passes into the second kind. There are brokers on the market who guarantee the execution of the SL order at the price indicated by us. But before you jump out of joy - read to the end.

This warranty is not unconditional. The criteria are different and depend on the broker itself. Most often, situations where the implementation would take place in a price gap (eg weekend) are excluded, but it also happens that after significant macroeconomic events. The question then arises "Why do we need such a guarantee?". Well, the broker thus assures us that we will not lose a price slippage under normal market conditions, i.e. we will not lose more than planned. Consequently, TP is also guaranteed quite often. This means that you will not get a negative price slide on the SL, but also a positive slide on it take Profit. And if there is a data gap or on Sunday, it will be one thing and you will not be covered by the warranty.

There are also other known cases - brokers offer an SL guarantee (with some, albeit smaller, exclusions) even when publishing a macro. It's just that not for free - they charge themselves extra for it. How much? Conditions vary - usually a few pips. And here you have to determine whether X pips more is worth the certainty of achieving SL points in your case.

Cutting SL by ...

If you have been trading for at least a few months, you have certainly met the term "SL cleaning" and/ or "SL cut". What does it actually mean and who actually does it? There are two theories and it is necessary to distinguish them. Both are real, although one is slowly becoming a myth.

What is the phenomenon itself "Cleaning"? It is in the slogan of traders that the course reaches a certain level (suspiciously, as if specjalnie in our opinion), realizing a series of SL traders' orders, and then rapidly reflects and already goes in this direction "Right - ours.""Direction.

# 1 - SL cutting by the broker

Such a suspicion is usually found in novice traders, whose large percentage of Stop Loss orders were executed on a point or the price only slightly exceeded their level. The easiest way is to blame the broker. And in fact, a good few years ago you could have encountered the unclean practices of brokers when they were dominating the market Market Makerswho regularly manipulated the rates on the platform. However, since then, a lot has changed, and that's a plus for traders.

READ NECESSARY: TOP 5 - Dirty plays by forex brokers

They are currently dominating STP / ECN brokerswho do not pay to do it. Meanwhile, Market Makers, seeing the growing competition and increasing customer awareness, largely abandoned bad practices that were very easy to verify. Currently, traders very often have 4-5 real accounts with various brokers. Therefore, independent verification of the correctness of quotes takes literally a moment and the fraud quickly emerges.

It cannot be said with certainty that all brokers have suddenly become honest. There are still manipulated black sheep on the market. But assuming that our brokerage house works fairly - who else can cut our Stop Losses?

# 2 - Coarse Fish Cleaning SL

Stop Loss: Big FishA big fish is a colloquial term for a large financial institution with an appropriately wealthy portfolio that is able to influence the market rate. And this is in the vast majority of cases the culprit of "cutting" our defense orders.

Retailers, based on a specific, easily available knowledge (book, training, available in the network) and with limited information, are easy bites for thick fish. An individual investor is relatively easily predictable in his actions. And they take advantage of this advantage without hesitation, pulling the course to the critical levels, where Loss centers are usually formed (usually in the vicinity of important support / resistance, above / on the local peak / hole, around round levels, etc., etc.).

How to set a Stop Loss?

Here we already enter the subject of building an investment strategy as well as risk and capital management. In short, there is no ideal method, but there are as many as there are traders. You have to choose the one that works best in your case. Remember, however, that Stop Loss is designed to protect you, not to plunge you. This is an order that is supposed to tell your position "enough" when it loses its raison d'être, that is, it will give a clear signal that the setup you placed under has expired. Try to minimize the risk and treat SL as a helpful tool.

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About the Author
Paweł Mosionek
An active trader on the Forex market since 2006. Editor of the Forex Nawigator portal and editor-in-chief and co-creator of the website. Speaker at the "Focus on Forex" conference at the Warsaw School of Economics, "NetVision" at the Gdańsk University of Technology and "Financial Intelligence" at the University of Gdańsk. Twice winner of "Junior Trader" - investment game for students organized by DM XTB. Addicted to travel, motorbikes and parachuting.