How to Place CFD Trading Stops

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Hard stop

This is the most basic stop loss - placing a stop a given distance from your entry price. However, having a stop like this in a liquid market, doesn't make much sense. Typically, the more liquid the market is, the farther out you place your stop loss, as your currency pair can have a price spike or dip before returning to its trend, and you do not need your CFD trade to close before the market turns in your favor (more orders here).

Average true range method

With this CFD method, the distance of the stop from your opening position is decided by the percentage of the average true range (ATR). ATR measures the volatility of a financial instrument over a specific - interval a day's trading range is simply from its high to low, while the true range extends this to the prior day's final price, if that was outside the present day's range.

The true range is the largest of:

1. The most recent period's highs less the most recent period's low

2. The most recent period's high less the prior close

3. The most recent period's low less the prior close

The most typical ATR is Fourteen, with a higher one indicating a rather more volatile market and a lower one indicating a less unstable CFD market. By utilizing a proportion of the ATR you make sure that your stop changes with changing conditions in the market.

For instance, if the NZD/JPY typical daily range is around 100 - 150, a day trader could utilize a Ten percent ATR stop. This would place the stop between 10 and 15pips from the opening price.

In contrast, an CFD investor - more here, who keeps positions open from several days to several weeks, would set a stop that's further away presumably Fifty percent or One hundred percent of the ATR. In the case of the NZD this would've been100 - 150pips.

Several day high / low

For a long position, a trader would place a stop at a predetermined day's low,eg the two-day low. Likewise, for a short position, a trader would place a stop at a pre-set day's high.

This can also work as a trailing stop in the case of a stop set at the two-day low, every day it'd be changed to the new two-day low.

Though this CFD technique is straightforward, it does open traders up to plenty of risk, particularly if you're entering a CFD trade shortly after a day with an enormous range. Long term traders may need to use weeks or months to ascertain their stop placements, which is again dangerous, but can appear sensible for someone that trades just one or two times a year.

Below/Above price levels

Some CFD traders choose to place stops on closes above or below certain price levels. Although this deters you from being accidentally closed out of the market, it does mean that you risk the market breaking out above or below your price level, leading to a large loss, so it is not advisable to use this kind of stop around important news announcements and other unstable periods.

Indicator stop

The indicator stop is a trailing stop method where you wait for an indicator to signal your exit from a CFD trade.

Momentum trading divergence is an example of this. When the cost of an asset makes a new low while an indicator begins to rise, or vice versa, this is commonly known as divergence. In the case of momentum trading divergence, a measure of momentum, for example Price Rate of Change, RSI and Stochastic, can be employed as an indicator.

If the asset reaches a new high as momentum is beginning to fall, this is a warning that the market may shortly fall and traders who were going long should begin planning their exit.

Choosing your stops

The same stops don't suit everybody, so assess your CFD trading style and your strengths and weaknesses before choosing which is best for you. If you have difficulty choosing when to leave a CFD trade, then an indicator stop may suit you. Or, if you find you keep getting closed out of the market before it turns in your favor, an ATR % stop could be best for you.

Created 20 Nov 2020
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