Equity Stop

An equity stop is one where the position will be closed in case the total equity in an account falls below a certain value. A stop loss at 2 percent of total equity is generally regarded as a conservative strategy, while the maximum is 5 percent for most money management methods. Thus, to give an example, a 1000 USD account would have the stop loss for an open position at the point where to the total equity would fall below 980 USD.
Both the disadvantage, and the advantage of the equity stop is its inflexibility. The equity stop provides a very solid criterion for deciding on the success or failure of a single trade, as there’s no way of being mistaken about an account in the red. On the other hand, the same inflexibility may prevent the trade from functioning as expected. The markets are volatile, and a trade that has a perfectly valid cause behind it may yet be invalidated by the random fluctuations that are not predictable.
Another important problem with the equity stop is its inability to prevent a string of losses. For instance, when the trader closes a position at a two percent loss, there’s nothing that will prevent him from opening another position in the same direction (buy or sell) a short while later, if the causes that justified the first trade are still in place. For instance, if the trader enters a sell order when the RSI is above 80, and consequently the stop loss is triggered, and the position closed, there’s little that will prevent the same events from being repeated if the price action repeats the same movements. In order to avoid this pitfall, the trader can tie the stop loss point to a non-price factor, and the rest of this article discusses such scenarios.