In this episode of Truth About FX, Walter dig into the topic of stop loss and if you should — or should not — wait for it to be hit before deciding your trade’s fate. According to him, it is important to ask yourself: is there a reason for the market to turn around at this point?

Hugh also identifies his own method which relies heavily on price action and instinct.

Download (Duration: 05:10 / 5.92 MB)

In This Episode:

00:37 -should I stay or should I go?

01:02 – hands-off

02:29 – time to get out

03:12 – set and forget

04:05 – the real kicker

Tweetables:

Does it look like it’s going to turn around? [Click To Tweet].

Set and forget. [Click To Tweet].

Bump up your risk to reward ratio. [Click To Tweet].

Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.

Hugh: Hi, Walter! Do you recommend getting out of your trade before your stop is hit?

Walter: Here is the thing: if you are one of those people who finds yourself getting into a really should-I-stay-or-should-I-go sort of thing and you talk yourself out of a trade, you moved down to the lower timeframe to see if you can figure out what is going to happen. That kind of stuff is going to get you in trouble.

So, I would not recommend doing that if you are that kind of a trader. You need to set and forget. You need to hit your stop loss or your exit or your take profit, like that needs to happen.

If you are more hands-off then you can do what I do which is, typically, my stop loss is like my worst case scenario. Sort of like I am asleep at night, something happens in the markets and the market is gone like three hundred pips in other direction and it stops me out. That is really how I look at my stop loss.

I don’t like to see it hit and most of the time. If I have a losing trade, my stop loss will not be hit. I actually get out if it goes, say, seventy, seventy-five percent of the way toward my stop. I am usually thinking, okay. I’ll look at it and say, “Is there a reason for the market to turn around here?” Does it look like it is going to turn around?

If the answer is no, then, I’ll usually dump the trade. So, what that means is I am reducing my average loser and it’s not the full one point zero R to use risk management’s peak. If you do not know what R is, Van Tharp’s book talks all about R and I’m sure most of you will understand that concept. That is how I do it, I get out in most cases long before it hits my stop.

Occasionally, my stop is hit and it really bumps me out and I do not like to do that. I do manage my trades and again the question I ask when I see the market go against me is: Is the market giving me a signal that would suggest I should get into a new trade and is that new trade in the direction of my trade that I am in?”

Or, is it in the opposite direction? If there is a signal to go in the opposite direction then, obviously, it is time to get out. That is how I manage it. I would be interested to hear how you do it, Hugh.