Placing Stop Loss Orders on Your CFDs

Helping traders understand how to place stop loss orders on their CFD trades.

A stop loss order is an instruction given by a trader to a broker to close out all positions exposed to the market if the price moves in a direction contrary to the trader’s

Stop losses are meant to be used to conserve capital, but if a trader does not understand how to use them, he will see a lot of CFD trades that have been placed in the right direction prematurely stopped out by stop losses that were too tightly applied without giving the trade some breathing room.

An illustration of this is given in the chart below.

Chart of NZDJPY showing an incorrectly placed stop loss

We can see that in the Sell setup above, if a trade is entered at the region (encircled green) closer to the resistance level, it is easier to set a conservative stop loss of about 30 pips knowing that the trade is not likely going to be jeopardized.

However, if the trade has run to the downside for a considerable distance as seen in the lower green encircled zone, then the stop loss has to be placed at a wider distance because the market has every tendency to retrace back to the resistance level, a good number of pips upwards.

This shows very clearly the importance of placing stop losses accurately and properly.

How can a trader place proper stop loss orders on his CFD trades?

The basic problem with badly-placed stop loss orders is that of the trade being placed too far away from a support point for long trades, and too far away from a resistance level for short trades. Any retracements in price will likely go to re-test these levels, and if this is the case, your stop loss is going to get in the way. If the trader decides to stretch the stop loss all the way back to these levels and the trade ends up a loser, the loss could be massive.

Another variation of this problem is that if the account size is not big enough and the trader was careless to commit too much capital to the trade, a margin call may occur before the stop loss is reached. Either way, this is bad. The only true way to apply a stop loss that is tight enough without jeopardizing the trade is to time entries properly. Place longs as close to a solid support level as possible. The support level will serve as a cushion on which a retracing price will bounce without going close to your stop loss. In the same vein, short trades should be placed as close to a strong resistance as possible.

Another way to place stop loss orders on CFD trades is to use very low risk in your trades. A trader who risks 1% on a $1000 account is only risking $10 on that trade. This means that a trade size of 0.01 lots on a trade where the stop loss may have to be stretched to 150 pips and above, (e.g. on a daily chart) will only lose the trader $15. In contrast, a 0.5 lot size trade with the same stop loss will lose $750 (that is 75% of the account). The importance of using low risk while placing your stop loss cannot be over-emphasized.

These two simple guidelines will help a trader to correctly place stop loss orders on his CFD trades.

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