Why is Stoploss an essential skill that every trader must master?

Many professional traders, even those with decades of experience, still do not use stop loss orders in their trading. This often confuses new traders: is using a stoploss really necessary or not? In reality, the answer depends heavily on each individual’s trading strategy and experience.

Why do some traders not need Stoploss?

Traders who do not use stop loss orders often share common characteristics:

They apply (hedging) strategies – an advanced risk management technique that allows them to offset losses from one position with profits from another.

They trade with large capital but do not use high leverage – when not overusing leverage, the absence of a stoploss does not pose an immediate threat to their account.

They adopt long-term investment strategies – such traders can hold assets for many years, so setting a stoploss is not compatible with their approach.

However, most current traders, especially short-term traders or those using leverage, need to strictly apply stoploss.

What exactly is a Stoploss and how does it work?

A (Stop Loss Order) is a risk management tool provided by trading platforms. When you open a trading position, you can set a specific price level. If the market moves against your expected direction and hits this level, the order automatically triggers, closing the position and limiting your loss.

Essentially, a stoploss addresses an unavoidable issue: we cannot predict the future perfectly. Even if your trading strategy has a very high accuracy, and technical indicators agree on a certain direction, the market can still fluctuate in completely unexpected ways.

Real-world example: You buy an asset at $100, expecting it to rise. Later, the price goes $120 - you want to hold on to make more profit. However, based on technical analysis, you determine that if the price drops to $105, your strategy is wrong. Instead of constantly monitoring price movements, you can set a stoploss at $105 to automatically close the position if this happens.

Many traders lose because they misuse Stoploss

According to statistics from major trading markets, an interesting phenomenon has been observed: many traders have a higher winning rate than losing rate, but still end up with net losses. The main reason lies in ineffective risk management.

Data shows that:

• These traders lose more money on each losing trade (big losses)
• But make less money on each winning trade (small gains)
• This creates a dangerous situation: the number of winning trades is not enough to cover the losses

The main reason is: they set a risk/reward ratio (risk/reward ratio) that is too high, causing each failure to have severe consequences.

The golden rule: How to set an effective Stoploss

To address the above issue, you can apply a simple yet powerful principle:

Set your take profit order equal to or greater than your stoploss.

This means that if you accept losing 50 pips on a trade, you should set a profit target of at least 50 pips – creating a risk/reward ratio of 1:1.

With this ratio, if you can win 51% of your trades, you will generate a net profit. This is a goal most short-term traders can achieve.

In practice, many professional traders apply a higher ratio – often 1:2 or 1:3, meaning they are willing to accept losing 1 to make 2 or 3. However, ratios above 1:4 are rarely used because they become too risky.

Why does Stoploss often get triggered before a new trend begins?

Many traders set stoploss but still encounter issues: the stoploss gets triggered just before the market reverses in the expected direction. This can happen for several reasons:

• Incorrect trend identification: You may confuse different timeframes or fail to recognize the current trend direction clearly.
• Stoploss set too close: When stoploss is too near the entry point, small fluctuations can trigger it.
• Not using supporting tools: Relying on intuition or arbitrary numbers for stoploss placement is very risky.

Using technical indicators for precise Stoploss placement

To solve these issues, you should use technical indicators as supporting tools. The two most popular indicators are:

Moving Average (MA) – Moving Average

The MA helps identify the overall trend by smoothing out price fluctuations.

Application steps:

1. Determine your trading timeframe (short-term, medium-term, or long-term)
2. Choose the appropriate MA (e.g., MA 20 for short-term, MA 50 for medium-long-term)
3. Observe the current price position relative to the MA
4. Place stoploss behind (or ahead if shorting) the MA

If the price crosses the MA against your expected direction, it’s a sign your strategy may be wrong.

Average True Range (ATR) – Average True Range

ATR measures market volatility and helps you set stoploss based on actual market movement rather than fixed numbers.

Application steps:

1. Activate ATR on your chart
2. Determine the multiplier (1, 2, 3…) depending on your timeframe and risk appetite
3. Find the nearest swing high or swing low on the chart (swing high or swing low)
4. For a buy order: Stoploss = Swing low - (ATR × multiplier)
5. For a sell order: Stoploss = Swing high + (ATR × multiplier)

This method is better because it automatically adjusts based on real market conditions.

Step-by-step guide to setting Stoploss

To practically apply these concepts, follow these steps:

Step 1: Choose an asset and identify the trend

Select an asset you want to trade and observe the chart with an appropriate timeframe (30 minutes, 1 hour, 4 hours depending on your strategy). Enable the MA indicator to identify the main trend.

Step 2: Apply ATR indicator

Activate ATR on the chart. Suppose ATR shows a value of 0.0006 (equivalent to 6 pips). If you want a risk/reward ratio of 1:2, multiply this value by 2, resulting in 12 pips for stoploss and 24 pips for take profit.

Step 3: Determine entry point and set Stoploss

Find the nearest reversal point on the chart. From there, calculate the stoploss level at the appropriate distance you computed in step 2. Place your order with corresponding stoploss and profit target.

Conclusion: Stoploss is mandatory, not optional

Even if you see skilled traders not using stoploss, it does not mean you should ignore it. They have advantages you may not have yet: decades of experience, excellent capital management, or hedging strategies.

For most modern traders, especially those using leverage or short-term trading, using a stoploss is not an option – it’s a requirement. It’s the difference between protecting your account and losing everything in a bad trade.

Start today: define your risk management strategy, set stoploss for each trade, and stick to it disciplinedly. This is the foundation to becoming a profitable long-term trader.