Risk Control Method №5: Stop-Loss Orders

Stop-loss orders are an important topic when it comes to futures trading. A stop-loss order is an order that you place with your broker to exit an open position if it reaches or exceeds a certain price. This is often referred to as a money-management stop. The purpose of a money-management stop is to attempt to limit your loss on each individual trade to a certain maximum amount.

There are several schools of thought regarding the use of stop-loss orders. Some say you should always use a stop-loss order and have it placed in the market as an open order. Some say you should use mental stops, meaning that you do not actually place the order to exit a losing trade until the market you are trading nears the stop price you had in mind. The third camp says that stop-loss orders should not be used at all, because they either interfere with the system you are using or because markets have a way of "running" stops, thereby stopping out a lot of traders just before the market goes back the other way. So which approach makes the most sense and which is the most likely to help generate the best results in the long run? Before attempting to answer this question, let's define exactly what a stop-loss order is, how it works, and the implications of using or not using stops.

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