What is a Oil Stop Loss Trading Order? and Factors to Consider When Setting
Stop Loss Oil Trading Order is a type of order that is positioned after opening a trade that's meant to cut losses if the oil 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 crude oil broker that will automatically close your oil trade transaction when it reaches a predetermined oil price. When set level is reached, your open trade is liquidated.
These oil orders are designed to cap the amount of money which trader can lose: by exiting the transaction if a specific crude oil price that's against the trade is reached.
Regardless of what you may be told by others, there is no question about whether these trading orders should or shouldn't be used - they should always be used.
One of the more challenging things in in Oil Trading is setting these orders. Put the stop loss too close to your entry crude oil price & you're liable to exit the trade transaction due to random market price volatility. Place it-toothe-stop-loss-order-too far away and if your'e on the opposite side of the trend, then a small loss may turn into a big one.
Skeptics will point out several disadvantages of these orders: that by placing them you are guaranteeing that, should your open position move in the wrong direction, you will end up selling at lower oil prices, not higher.
The skeptics will also argue that in setting stops you are vulnerable to exit a transaction just before the crude oil market moves in your favor. Most investors have had the experience of setting a these orders & then seeing the crude oil price retrace to that level, or just below it, and then go in direction of their original market oil trend analysis. What might have been a profitable trade transaction rather 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 putting 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 crude oil market, this is because the most unbiased analysis is done before entering a trade position. After entering the crude oil market a trader will tend to interpret the crude oil market differently because they have a bias towards one-sidea-particular-side, the direction of their analysis.
Unexpected news can come out of nowhere and significantly affect the oil price: this is why it is so important to have a stop loss order. Its best to cap losses early when a trade position is moving against you, it is best to cap your losses immediately rather than waiting it to become a big one. Again, if you set your stop loss orders when you are entering a trade transaction, then that is when you are most unbiased.
A key question is exactly where to place a this order. In other words, how far should you place this below your purchase oil 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 oil technical indicators.
Experienced money managers instruct that you should not lose more than 2 percent of your trading account equity on any single oil trade. If you have $50,000 in trading capital, then that would mean the maximum loss you should set for any 1 single trade is $1,000.
If you opened a oil trade, then you would cap your trading risk to no more than $1,000. In which case you'd set your stop loss order at the number of pips that are equal to $1000 and would have $49,000 left in your account if you closed the trade transaction at the maximum loss allowed. The topic of Oil Trading risk management is wide & it is covered in the money management topics.
Factors to Consider When Setting
The most important question is how close or how far this order should be from the crude oil 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 place these levels on a crude oil 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 a single transaction. General rule is that a trader should never lose more than 2 percent of the total account capital on any one single transaction.
2. Volatility - this refers to the daily crude oil price range. If oil regularly moves up and down in a range of 100 pips or more during the course of the day, then you cannot put a tight stop 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 crude oil market conditions are favorable then it is possible to comfortably give your trade more room. However, if the crude oil 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 better trade transaction next time.
4. Position size - if the position size opened is too big then even the smallest decimal crude oil price movement will be fairly large in percentage terms. This means that you have to put a tight stop loss which might be taken out more easily. In many cases it's better to move to a smaller trade transaction so-as-tosothat-to allow your trade position more space for fluctuating, by placing a fair level for this order while at the same time limiting the risk.
5. Account Capital - If your account is under-capitalized then you will not be able to set your stops accordingly, because you'll have a big amount of money in a single trade transaction which will obligate you to put very close stops. If this is the case, you should think seriously about whether you've enough capital to trade Crude Oil in the first place.
6. Market conditions - If the crude oil price is trending upward, a tight stop might not be necessary. If on the other hand the crude oil price is choppy & has no clear direction then you should use a tight stop loss order or not open any positions at all.
7. Chart Time frame - the bigger the chart timeframe you use, the bigger the stop should be. If you were a scalper trader your stops would be much tighter than if you were a day or a swing trader. This is because if you're using longer chart time frames & you determine the crude oil price will be move up it doesn't make any sense to put a very closetight stop loss because if the crude oil price swings just a little, your order will be hit.
The method of setting that you choose will significantly depend on what type of trader you are. The most commonly used technique to determine where to set is - resistance & support regions. These areas give good points for setting these stop loss orders as they are most dependable regions, because the support & resistance levels won't be hit many times.
The method of how to set these stops that you choose should also follow the guide-lines above, even if not all, those which to your oil trading strategy.
