Stop level is important but often overlooked. Here's why you should watch where your broker stands in regard to stop level.
During your journey in learning how to trade, you might come across the term "stop level". It's a very important aspect that traders often overlook. Some people confuse it with stop out, but it's actually quite different. Stop out is a close order that is automatically applied to floating positions when the equity is running out, whereas stop level is more about a limit when placing trading orders. There are three important things you should know about stop level. Let's talk about them more.
Understanding Broker Stop Level
So, what is stop level and why you should pay attention to it? Stop level is a limit that determines where you should place a stop loss, take profit, and stop orders (buy stop and sell stop) from the current price. The determiner is usually set in pips and it differs for each broker.
For example, your broker's stop level is at 2 pips. Therefore, you can only place a stop order on a price level with a minimum 2 pip distance from the current price. Let's say you are trading EUR/USD, and the pair is currently at level 1.0727. Because the stop level is 2 pips, you can only place an order starting 2 pips above or below that level.
Sometimes, a broker's stop and limit levels are set together. However, their roles are distinguished by the types of pending orders. If stop level is applicable for buy stop order and sell stop order, the limit level will be used for limit pending orders (buy limit and sell limit). Oftentimes, forex brokers set stop and limit levels at the same number of pips.
How To Find Out Your Broker's Stop Level?
Finding a broker's stop level is very easy. First, you can find out on your broker's official website. Most brokers write that information for visitors to find out. Most of the time, the stop level stated on the broker's website is for EUR/USD pair. It's important to note that major pairs usually have lower stop levels compared to cross pairs or exotic pairs.
If you find it difficult to search the information online, there is a more accurate way to check your broker's stop level. You can directly go to your trading platform, either MetaTrader 4 or MetaTrader 5, and follow these easy steps.
1. First, you need to pick the currency pair. Let's say you choose EUR/USD, then right-click EUR/USD on the Market Watch window and choose Symbols.
2. In the follow-up window, choose the pair and click "Properties".
3. It will show you some information regarding the trading condition of that particular pair in your broker, including the stop level.
What You Should Know About Stop Level
Although discussions about stop levels are not as mainstream as leverage or spread, it is still an important feature to understand from your broker, especially for short-term traders like scalpers. There are several things about stop level that you should know. How so?
1. Stop Loss Can't Be Smaller Than Stop Level
You can't place stop loss with an amount smaller than your broker's stop level. This might not be a problem if the forex broker stop level is around 1-3 pips. But if the broker stops level is up to 14 pips, that means you can't set a stop loss smaller than 14 pips. This might not be ideal for day traders and scalpers who use low spread or cent account.
2. Scalpers can Benefit from Brokers With Low Stop Level
Scalping needs high accuracy. If you're a scalper and your broker's stop level is high, it can be a big problem. Therefore, scalpers need to look for brokers with low stop levels so that their execution can be as close to their targets as possible.
3. It's Not Ideal for Automated Trading
Some traders use forex robots to trade. Normally, this is not a big deal. But traders who use such automated trading tools should be careful with the broker's stop level. Typically, forex robots are set with their own rules when it comes to entry and exit positions. So when your broker sets a stop level that is too far from the current price, it may affect the robot's performance.
So, What is The Best Stop Level?
Despite being an important part of trading, stop level is often overlooked. It is safe to say that the smaller the stop level, the better it is for traders. A low stop level will bring fewer difficulties for traders. It's no surprise that a lot of traders prefer forex brokers that can provide it.
That being said, it's not easy to find a broker with that convenience. If there is any, they are most likely ECN brokers. Sure, you can consider using this broker, but this kind of broker might not be suitable for all types of traders. Make sure you are aware of the risks before using their service.
ECN brokers aren't always bad, they might be good for your trading style. But, what is ECN brokers and what about their fees? Should you be concerned about them?