Stop Loss Orders - An Account Protection Tool You Can't Miss in Trading

Why Do Most New Traders Fail?

Statistics show that the majority of new traders blow up their accounts within the first few months. The main reason is not because they lack a strategy, but because they completely ignore or misuse risk management tools — specifically, what is a Stop Loss order and how to apply it correctly.

Many traders are confident they can predict the market, so they skip the step of setting a Stop Loss. As a result, a few big winning trades cannot compensate for heavy losses. That is why risk management is so important.

What Is a Stop Loss Actually?

A Stop Loss order (SL) is a tool that allows you to automatically close a position when the market moves against your expectation. It acts like a “safety parachute” — protecting you from excessive losses that you cannot afford.

When you open a trade, you determine in advance the price level at which you will “accept defeat” and exit the market. Instead of constantly monitoring, the Stop Loss order will automatically execute when the price reaches the level you set.

A simple example: You buy 10 Tesla shares at $300/share. After some time, the price rises to $350. However, based on your analysis, if the price drops to $325, that’s a clear signal that the trend is reversing. At this point, instead of watching every fluctuation yourself, you just set a Stop Loss at $325 - if the price hits this level, the order will automatically sell all 10 shares.

Do Professional Traders Use Stop Loss?

There has been an ongoing debate in the trading community: is a Stop Loss really necessary? Some cite Warren Buffett — the legendary investor — who does not use Stop Loss, to prove that it’s not essential.

However, the truth is much more complex:

• Warren Buffett invests long-term — his strategy can last decades, which is completely different from short-term trading for most people
• He does not use leverage — trading with real capital and no leverage significantly reduces risk
• He employs (hedging) strategies — something most traders do not have

Conversely, if you trade short-term, use leverage, and do not have hedging strategies — then Stop Loss is absolutely necessary. It not only protects your account but also helps you avoid emotional decisions.

Where Should You Set Your Stop Loss?

This is the most important question. Data from exchanges shows an interesting fact:

Most traders win more often in number of trades, but lose more in total money. In other words, each time they lose, it’s a big loss. Each time they win, it’s a small gain. That’s the formula for always losing money.

The simple solution: The risk/reward ratio (Risk/Reward Ratio) must be balanced or profit should be greater than risk.

A specific example:

• If you set a Stop Loss 50 pips away, you should set a take profit at least 50 pips — a 1:1 ratio
• If you set a Stop Loss 50 pips away, you should set a take profit at 100 pips — a 1:2 ratio

With a 1:1 ratio, if you win 51% of your trades, you will have a net profit. Most professional traders apply a 1:2 or 1:3 ratio, rarely exceeding that.

How to Use Technical Indicators to Place Effective Stop Losses

However, just knowing the Risk/Reward ratio is not enough. A common problem is: Stop Losses get triggered too early, before the main trend actually begins.

To fix this, you can use technical indicators:

###Method 1: Using Moving Averages (Moving Average)

• Identify the current market trend (uptrend or downtrend)
• Choose an MA suitable for your timeframe (MA 20 for short-term, MA 50 for medium- and long-term)
• Place the Stop Loss just below the MA (for buy trades) or above (for sell trades)

###Method 2: Using ATR (Average True Range)

ATR measures market volatility:

• Enable ATR on your chart
• Determine the multiplier (1, 2, 3 depending on your strategy)
• For a long (buy) trade (Long): take the nearest swing low minus (ATR × multiplier)
• For a short (sell) trade (Short): take the nearest swing high plus (ATR × multiplier)

Example: If current ATR is 6 pips, and you choose a multiplier of 2, your Stop Loss will be 12 pips away from the reference point.

Step-by-Step Guide to Setting Stop Loss

To combine the above knowledge, here is a practical process:

Step 1: Analyze and Identify the Trend

On the USD/SGD 30-minute chart, enable the 20 MA. Notice that the current price is above the 20 MA, suggesting the short-term trend is weakening. You decide to place a sell (Short).

Step 2: Use ATR to Determine Stop Loss Level

• Enable ATR indicator
• Suppose ATR is 0.0006 (equivalent to 6 pips)
• Choose a Risk/Reward ratio of 1:2
• The nearest swing low is 12 pips below the current price — that will be your Stop Loss
• Take profit should be set at twice that distance, 24 pips away

Step 3: Enter Values into the Trading Platform

When placing a sell order, input:

• Entry price: current price
• Stop Loss: a price above the entry, calculated as above
• Take profit: a price below the entry, twice the distance from the entry point

Common Mistakes to Avoid

1. Setting Stop Loss too close: triggers from minor random fluctuations
2. Setting Stop Loss too far: accepting excessive risk
3. Not setting a take profit: winning trades can turn into losses
4. Moving Stop Loss after entering the trade: often driven by emotions, leading to losses

Conclusion

Stop Loss is not a sign of weakness or lack of confidence. It is a sign of professional risk management. Even the most successful traders in the world use it or have similar risk control mechanisms.

Start today: for every trade you make, always set a Stop Loss first. That’s the first step to becoming a disciplined trader with sustainable profits.