Podcast:

How Big Should Your Stop Loss Be?

In this weekly video:

00:33 – What size should your stop loss be? It depends

01:10 – The way I like to trade

02:30 – You need to factor all those things together.

03:44 – Adjust your position size – use my free lot size calculator

04:27 – Should you use a trailing stop instead?

05:30 – Don’t simply move your stop loss to breakeven

06:08 – A set and forget approach

How big should your stop loss be as a Forex trader? Let's talk about that and more right now.

Hey traders. Andrew Mitchem here, the Forex trading coach. Video and podcast number 225. In this episode, I want to talk about a really important subject. It's all about, how big should your stop loss be?

What size should your stop loss be? It depends

My initial answer is probably not what you wanted to hear. My initial answer would be, it depends. It depends on a lot of things, so I can't give you a straight number of pips answer. I'll tell you why shortly. Stop losses, they're really important. In my opinion you should definitely use one. Some people say, “Don't use them at all”. They say, “If you don't have a stop loss you can't get stopped out of the market”. The problem that I see with that is that, that's fine in theory. The problem is that one or two bad trades that goes against you, and it just keeps going. Those are the trades that can do some serious damage on your account.

The way I like to trade

The way I like to trade is, I like to have a controlled and equal risk on every trade that I take. It doesn't matter what the strategy, what the time frame or the chart is. What the currency pair is. What the day of the week is. What the direction of the trade is. It doesn't matter. Therefore, when I'm taking those trades, I need to know the size of the stop loss. But I don't just take a generic stop loss. I don't say, “This trade is going to have a 30 pip stop loss”, or, “This trade's going to have a 50 pip stop loss”. You can not trade successfully like that, because a 30 pip or a 50 pip stop loss doesn't mean anything.

The stop loss size of your trade needs to be determined by a few things. One, your overall strategy. Two, the currency pair you're trading, because of course different pairs have different movements, so different amounts of move within a day. As an example, if you were trading the Euro and British Pound, vastly different to have a stop loss of 30 pips on that, as opposed to the British Pound and New Zealand Dollar, which could move 200 or 300 pips in a day. As opposed to the Euro/Pound that might move 50 pips in a day. It also depends on the time frame of the chart you are trading, and it also really importantly depends on the current market conditions.

Always place your stop loss at a level that protects the trade

You need to factor all those things together. What you should do is, always place your stop loss at a level that suggests that if that level gets hit and the price gets to that level, you accept that you're wrong, the trade is wrong, the set up is wrong. Whatever it might be. You accept that you take a loss on that particular trade. That's how you should place your stop loss. The level that gives the trade room to breathe, room to move, but also says that, “If it gets to this level, then I'm wrong”. That's fine. You're going to be wrong as a Forex trader. No one is 100 percent accurate all of the time. Having a stop loss at that level that's a safety buffer, a safety level.

Once you have that, you can then calculate the stop loss size in pips, but it should never be just 30 pips or just 50 pips. It should never be a set level depending on what pair or what time frame you're on. You shouldn't do that. You should put that stop loss there according to that actual trade itself. That's why my answer is to,