What's a Stop Loss Gold Order? and Factors to Consider When Setting
Stop Loss XAUUSD Order is a type of order which is positioned after opening a trade that is designed to minimize losses if the gold market trend moves against you.
It is a predetermined point of exiting a losing transaction & it's meant to control losses.
A stop loss is an order placed with your xauusd broker that will automatically close your xauusd trade transaction when it reaches a predetermined gold price. When set level is reached, your open trade is liquidated.
These xauusd orders are intended to restrict the sum of money that trader can lose: by exiting the transaction if a specific gold price that's against the trade is reached.
Regardless of what you might be told by others, there's no question about if these orders should or should not be set - these orders should always be set.
One of the more challenging things in in XAUUSD Trading is setting these orders. Put the stop loss too close to your entry price & you're liable to exit the trade due to random market volatility. Place it too far away and if you are on the wrong side of the trend, then a small loss could turn into a large one.
Critics will point out several disadvantages of these orders: that by placing them you're guaranteeing that, should your open position move in the wrong direction, you will end up selling at lower gold trading prices, not higher.
The skeptics will also argue that in setting stops you are vulnerable to exit a transaction just before the xauusd market moves in your favor. Most investors have had the experience of setting a these orders & then seeing the gold trading price retrace to that level, or just below it, and then go in the direction of their original market xauusd trend analysis. What may have been a profitable trade position now instead turns into a loss trade.
Experienced traders always use stop orders as they are a crucial part of the discipline required to succeed because they can limit a small loss from becoming a large one. What's more, by purposefully placing these orders whenever you enter a position, you end up making this important decision at the point in time when you are most objective about what is really happening with xauusd market, this is because the most objective technical analysis is done before opening a trade transaction. After opening the xauusd market an investor will tend to interpret the xauusd market differently because now they have a bias toward one-sidea-particular-side, the direction of their analysis.
Unexpected news can come out of nowhere and significantly affect the gold trading price: this is why it is so important to have a stop order. Its best to cut losses early when a trade transaction is going against you, it's best to cut your losses immediately instead of waiting it to become a big one. Again, if you set your stops when you're entering a trade, then that is when you are most unbiased.
A key question is exactly where to place this order. In other words, how far should you place this below your purchase gold trading price? Many traders will tell you to set pre-determined - maximum acceptable loss, an amount that's based on your trading account balance rather than use of technical indicators of the xauusd in question.
Experienced money managers instruct that you should not lose more than 2 percent of your account equity on any one xauusd transaction. If you have $50,000 in capital, that then would mean the max loss that you should preset for any one transaction is $1,000.
If you bought 1 standard lot of a xauusd instrument, then you'd limit your risk to no more than $1,000. In that case you'd put your stop order at 100 pips (points) & would have $49,000 left in your trading account if you exited the trade position at the max loss allowed. The topic of XAUUSD Trading risk management is wide and it's covered under money management topics.
Factors to Consider When Setting
Most important question is how close or how far this order should be from the gold trading price where you entered the position. Where you set will depend on several factors:
Since there aren't any rules cast in stone as to where you should set these zones on a xauusd chart, we follow general guidelines that are used to help put these levels correctly.
Some of the general guidelines used are:
1. Risk - How much is one willing to lose on one transaction. The general rule is that a trader should never lose more than 2 percent of the total account capital on any one transaction.
2. Volatility - this refers to the daily gold trading price range of a xauusd. If a gold trading price regularly moves up and down in a range of 100 pips or more over the course of the day, then you can't set a tight stop loss order. If you do, you will be taken out of the trade position by the normal market volatility.
3. Risk to reward ratio - this is the measure of potential reward to risk. If the xauusd market conditions are favorable then it is possible to comfortably give your trade more room. However, if the xauusd market is too choppy it then becomes too risky to open a transaction without a tight stop then don't make the trade at all. The risk to reward isn't in your favor and even placing tight stop orders won't guarantee profitable results. It would be more wiser to look for a much better trade transaction next time.
4. Position size - if the position size opened is too big then even the smallest decimal gold price movement will be fairly large in percent terms. This means that you have to put a tight stop loss which might be taken out more easily. In many cases it is better to shift to a smaller trade transaction so-as-tosothat-to allow your trade transaction more room for fluctuation, by putting a rational level for this order while at same time capping risk.
5. Account Capital - If your account is under-capitalized then you will not be able to set your stops accordingly, since you will have a big amount of money in a single trade transaction which will constrain you to set very tight stops. If this is the case, you should think seriously about whether you've enough capital to trade XAUUSD in the first place.
6. Market conditions - If the gold trading price is trending upwards, a tight stop might not be necessary. If on the other hand the gold trading price is choppy & has no clear market trend direction then you should use a tight stop loss or not execute any transactions at all.
7. Chart Time frame - the bigger the chart timeframe you use, the bigger the stop should be. If you were a scalping your stops would be tighter than if you were a day or a swing trader. This is because if you are using longer chart timeframes & you determine the gold trading price will be move up it does not make sense to put a very closetight stop loss because if the gold price swings just a little, your order will be hit.
The method of setting that you choose will mostly depend on what type of trader you are. The most oftenly used technique to determine where to set is - resistance & support zones. These areas give good points for setting these orders as they are most reliable, because the support & resistance areas will not be hit many times.
The method of how to set these stops that you select should also follow the guide-lines above, even if not all, those which to your gold trading strategy.