Stop losses are designed to limit losses by executing a market order once the price reaches a certain level. For most traders, this level is usually below their planned entry point or above their planned exit point. In theory, when placed at appropriate levels, stop losses are designed to cut your loss short or help you with locking in a profit. But do scalpers also use stop loss?
Scalpers do use stop losses occasionally. However, implementing stop losses into a scalping strategy is not always easy. With the high frequency nature of scalp trading, managing stop loss to control exposure is difficult. More importantly, profit locking is almost always hard to achieve through stop losses when scalping.
In this article, we explore where and when scalpers use stop-loss orders, why they don’t set them to lock in profits, and the dangers of doing so. Additionally, we will also discuss several alternatives for you to consider if you are just getting started with trading, or looking to further refine your existing trading strategy.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
How Scalpers Use Stop Loss?
When scalping, it is extremely easy to get stopped out on positions before the price moves against them significantly. These transactions take place within a fraction of a second using high-speed trading programs that access liquidity from global markets across multiple asset classes, including:
- Commodities, etc.
That being said, scalpers do use stop loss orders in some cases.
If a scalper gets stopped out on their trades by reaching their pre-set stop loss level for whatever reason – bad timing, unknown news release, poor market conditions, etc. – they’ll experience losses. However, with a stop loss order being deployed, these losses would be within the thresholds determined by the trader. Hence, using stop loss orders prevents scalpers from experiencing indigestible losses should the market move against their position.
Furthermore, when you’re running a stop-loss order manually, it’s much easier to monitor the markets. This way, you can move your stop or cancel your position altogether when needed. You could also re-enter your position for fresh profits. That’s because you’re using lower-frequency trading systems that execute trades at set time intervals rather than at pre-set thresholds.
Stop-Loss Manages Risk for Scalpers
We’ve already established that scalpers use stop losses so that they get stopped out before their position moves against them by large amounts. However, this situation by itself doesn’t encourage scalping strategies in general since getting stopped out is normal when using any system to manage risk.
Scalping means executing a high volume of trades at a very fast speed and with a very small size, usually over short periods of time. Being a successful scalper requires a lot of discipline because there’s no room for emotions or mistakes.
The majority of traders who try scalping won’t last long due to the stress involved and lack of patience required. But if you can execute it successfully, scalping provides plenty of opportunities for making money in the financial markets in almost any time frame.
Stop-loss orders, when executed, lock in the price you bought your assets for or the price you sold them at. Scalp strategies execute countless trades during active trading hours; therefore, locking in prices means locking in losses. That makes it impossible to actively trade and keep profits on a consistent basis.
The primary reason why scalpers use stop-loss orders is to keep themselves in the game long enough to benefit from their winning trades outweighing their losing ones. Even if that means taking small losses on some of their trades, it’s better than quitting before the game is over.
Alternatives to Stop-Loss Orders
There are actually several alternatives to using stop-loss orders where you place your exits at predetermined price levels. Alternatives most commonly include laddering and trailing stops.
When you trade with a stop-loss order, you must be in control of your emotions. You need to determine the appropriate amount of risk for your account size, time frame, and personality profile. Using an efficient stop-loss strategy can prevent emotional mistakes that result from greed, fear, or lack of preparation when trading without one.
Laddering – A Modified Stop-Loss Order
Laddering is a technique used by traders to hedge risks when attempting to make a profit from small price fluctuations. It can be used in place of traditional stop-loss orders and is often coupled with short selling. In this scenario, investors purchase shares at three different times but sell them at three different prices.
The first share they buy might be a long position with a target goal of turning a profit in the near future. The second share they buy has an expected lower price than the first purchase’s market value, placing it into the “loss zone.” If the stock price decreases after the initial purchase and enters this, then it will be sold at the second purchase’s price.
The third purchase has an expected higher price than the first, placing it into the “profit zone.” If it increases in value after being bought and enters this, it will be sold at this price. Of course, if the stock decreases in value so much that it falls out of all three zones, all shares bought earlier would be sold at a loss. And vice versa, if the stock value goes up so much that they fall out of all three zones, then all shares bought earlier will be sold for a profit.
It involves placing your stops progressively further away (typically 1-3 pips) as price moves in your favor by predetermined amounts until you reach either predetermined target levels or an appropriate risk/reward ratio. This method requires constant re-calculation and won’t be as effective as a stop order if the price moves quickly.
This method entails moving your stops at predetermined levels in the direction of price movement until you reach either predetermined levels or an appropriate risk/reward ratio. However, there’s no guarantee of winning trades because you use stops, not price levels.
A trailing stop-loss order is a conditional trade order which becomes a market order when the best bid at the time of entry is equal to or less than the specified price. It can be used to help purchase stocks that are temporarily undervalued, but it should only be implemented if you have other orders in place for protection.
How Do Stop-Loss Orders Affect Scalpers?
Stop-loss orders discourage scalping strategies because small losses add up. Using stops is like buying insurance on every trade; there will be times where you don’t need them and times where you do, which is pretty much impossible to predict accurately.
The time and effort required to constantly monitor the markets to move stop-loss orders reduce scalping efficiency. Also, when using a stop loss, you usually lock in small losses when market conditions aren’t in your favor.
Stop-Loss Orders Educate Scalpers
A solid understanding of how individual instruments move in relation to one another can help scalpers manage their risks more efficiently. That’s because it allows them to use tighter stops when needed.
The drawback here is that scalpers need additional research before putting these strategies into practice. However, since scalping deals with very high volumes over short periods of time, it doesn’t require a lot of time to learn such patterns.
The bottom line is that stop-loss orders provide the most efficient exit strategy for all market conditions and can be used by scalpers as well. The amount of extra research required will vary depending on your level of experience; however, stop losses definitely have some positive effects on a scalper’s strategies.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Using stop-loss orders when scalping is highly effective for minimizing risk, maximizing return on investment, and reducing stress caused by prolonged market conditions. Scalpers do use stop-loss orders, but they don’t use them in the way that they were intended.
Stop losses are designed to help traders lock in a profit automatically and ensure their account is properly balanced so it does not go into debt. A solid understanding of how individual instruments move in relation to one another can help scalpers manage their risks more efficiently by allowing them to use tighter stops when needed.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.