Why do most new traders fail: Lack of understanding about Stop Loss orders

When starting to trade, many people think that just having a good strategy is enough to make money. But the reality is different – what determines success or failure is not the number of wins, but how you manage your losses. And the most important risk management tool is the Stop Loss order.

What is a Stop Loss order and why is it so important?

A Stop Loss order (or also called a Stop Loss) is a tool provided by the trading platform that allows you to automatically close a position when the price reaches a certain level you have set in advance. In other words, this is your “safety boundary” – the point where you decide not to incur further losses.

Why is the Stop Loss order important? Because we cannot predict the market 100% accurately. Even if your strategy has a high win rate, and technical indicators agree on a direction – the market can still unexpectedly reverse. And if you don’t have a Stop Loss order, you will let losses grow infinitely.

When does a Stop Loss order get triggered?

Imagine you buy 10 Tesla (TSLA) shares at $300 each share. The price rises to $350. You want to hold on to make more profit, but also worry if the price drops. After analysis, you decide that if the price falls to $325, you will sell to preserve profits. Instead of watching the screen all day, you just set a Stop Loss order at $325. When the price hits this level, the order automatically triggers and sells all 10 shares for you – completely automatically.

Why do professional traders not use Stop Loss?

Some argue that Warren Buffett doesn’t use Stop Loss orders, so why should we? The answer is very simple:

• Buffett invests long-term (for decades), while most traders trade short-term (days, weeks, months)
• Buffett does not use leverage, whereas traders often use leverage to maximize profits
• Buffett employs hedging strategies (hedging), which not everyone can do

For these reasons, using Stop Loss orders for short-term traders is absolutely necessary.

The secret of risk management: Loss/Profit ratio

A statistical study on forex trading shows: Most traders have a higher win rate than loss rate, but they still lose money. Why? Because they lose more money when they lose, compared to the profits when they win.

This leads to a golden rule:

Take profit orders should be equal to or greater than Stop Loss orders

For example: If you set a Stop Loss of 50 pips, set a take profit order of at least 50 pips (a 1:1 ratio). In reality, most professional traders apply a ratio of 1:2 or 1:3 (lose 1, gain 2-3). With a 1:1 ratio, you only need a 51% win rate to be profitable.

Where is the most effective place to set a Stop Loss?

Common issues encountered: You set a Stop Loss, but the market triggers it and then moves in the direction you predicted. Why?

Possible reasons:

• You haven’t correctly identified the market trend
• You set the Stop Loss too close
• You used incorrect techniques

To address this, you can use technical indicators to determine the optimal Stop Loss placement more accurately.

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

• Identify the market trend (up or down)
• Enable the appropriate MA indicator (MA 20 for short-term, MA 50 for medium-long term)
• Place the Stop Loss when the price touches the MA

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

ATR helps you understand the price volatility, thus calculating a reasonable Stop Loss:

• Enable the ATR indicator on the chart
• Determine the multiplication factor (1, 2, 3 depending on the trend)
• If opening a long position: Take the nearest reversal point upward minus (ATR × factor)
• If opening a short position: Take the nearest reversal point downward plus (ATR × factor)

Practical guide to placing a Stop Loss order

Step 1: Choose a trading asset, for example, USD/SGD pair, 30-minute timeframe. Enable the MA 20 to observe the trend.

Step 2: Enable the ATR indicator. Suppose the current ATR is 0.0006 (6 pips). You select a risk:reward ratio of 1:2. Find the nearest swing low (downward reversal point). The Stop Loss will be 12 pips away (6 × 2), and the take profit will be 24 pips away.

Step 3: Place a short sell order, input the Stop Loss and take profit values into the trading form.

What’s next?

Besides the Stop Loss order, you should learn about other risk management tools such as Trailing Stop (Stop Loss that follows the price), Limit Orders (limit orders), and most importantly, always apply risk management principles in every trade. Start with a demo account with virtual funds to practice and understand the mechanisms before trading with real money.