Stop Loss send with order VERSUS Stop loss triggered/managed by code (virtual stop loss)

[algotrader01]

Hello, what do you think is the better way to manage your stop losses when you trade real stocks and NOT CFDs. 

1. Send stop loss directly within your market order so that it lies at the broker/exchange side

2. Or manage stop loss within your code (virtual stop loss) meaning when the price reaches your defined stop loss a market sell order is sent to close your buy position

In my opinion it is better to send the stop loss directly within your buy market order so that it lies at the broker/exchange side in cases where, for instance, MT5 or the Server crashes or connection to the broker is slow or maybe even in cases of fast falling markets. 

But anyhow, what are your opinions? Thank you!

[Fernando Carreiro]

algotrader01:

Hello, what do you think is the better way to manage your stop losses when you trade real stocks and NOT CFDs. 

1. Send stop loss directly within your market order so that it lies at the broker/exchange side

2. Or manage stop loss within your code (virtual stop loss) meaning when the price reaches your defined stop loss a market sell order is sent to close your buy position

In my opinion it is better to send the stop loss directly within your buy market order so that it lies at the broker/exchange side in cases where, for instance, MT5 or the Server crashes or connection to the broker is slow or maybe even in cases of fast falling markets. 

But anyhow, what are your opinions? Thank you!

In my own trading, I use a mixture of both, irrespective of the type of symbol. Since I like to control the S/L and T/P based on various conditions, including bid prices and not ask prices, I manually control when to close positions in the code on the terminal side, but I set a real broker stop, a little further out as a critical stop, in case I lose communications or the applications hangs or some other critical failure.

Most of the time, for S/L, I use a virtual stop at 1% Risk and a true broker hard stop at 2% risk. When using a Trailing stop, I also use an equivalent distance between the virtual stop and the real broker stop.

I sometimes also widen it a bit more to compensate for spread volatility when I have factored that into my risk assessments and money management.

[algotrader01]

Fernando Carreiro:

In my own trading, I use a mixture of both, irrespective of the type of symbol. Since I like to control the S/L and T/P based on various conditions, including bid prices and not ask prices, I manually control when to close positions in the code on the terminal side, but I set a real broker stop, a little further out as a critical stop, in case I lose communications or the applications hangs or some other critical failure.

Most of the time, for S/L, I use a virtual stop at 1% Risk and a true broker hard stop at 2% risk. When using a Trailing stop, I also use an equivalent distance between the virtual stop and the real broker stop.

I sometimes also widen it a bit more to compensate for spread volatility when I have factored that into my risk assessments and money management.

Hi and thank you for your fruitful reply. A combination of both might indeed be a better solution.

I worked with both approaches beforehand and I had the feeling that when you send the stop loss directly with your order it is somehow more likely to be triggered near that price than compared to sending a new sell market order when the price reaches the stop loss. Did anyone experience this behaviour as well?

Thanks!

[Fernando Carreiro]

algotrader01: I worked with both approaches beforehand and I had the feeling that when you send the stop loss directly with your order it is somehow more likely to be triggered near that price than compared to sending a new sell market order when the price reaches the stop loss. Did anyone experience this behaviour as well?

No, that is mostly psychological bias affecting you. Also, if your S/L is near the most obvious Support and Resistance zones, then there will most undoubtedly be many positions being closed and opened by other traders which will affect spread and slippage. You should do proper trade history analysis in order adjust your stops to better compensate.