Podcast:

Where You Should Place Your Stop-Loss, and Why

In This Video:

00:20 A Question on Stop Losses

01:29 Connecting your Stop Loss to Market Conditions

02:48 Standardise your Approach, not your Stop Loss

04:52 The Markets this Week

I want to talk about where you should place your stop-loss, and why. So let’s talk about that and some more great trading information right now!

Hi Forex Traders, this is Andrew Mitchem here, the Forex Trading Coach and today is Friday, the 6th of March and I want to talk about where you should place your stop loss and why!

A Question on Stop Losses

The reason for that topic is that I’ve had an email here from Wackyl – I hope I pronounced that right – and the question is, “Would you please tell us about the placing of our stop-losses. I know that most people do it wrong. I’m not sure that the way I am doing it is right!”

So that’s the question that’s come through and really, when you think about stop loss, what is it? Well, we know it protects the trade but when you think about it, a stop loss should be placed at a level that means that if the trade that you take goes wrong, goes against you, then it’s no longer valid. So, what that means is that you need to look at your charts, in terms of placing your stop loss.

The problem is that most people just place a random, or not so much a random but a set level at random places. So, what I mean by that is people were to say, they’ve placed a stop-loss at 20-pips. Why 20-pips? Who knows! That’s what the Internet or someone tells them they need to place their stop loss at 20-pips or 50-pips or whatever it might be. It’s generally something ending in a zero and that’s the way that most people trade.

Connecting your Stop Loss to Market Conditions

Now, when you think about the logic behind that, what relevance does that have to the trade setup? What relevance does it have to the current price? What relevance does it have even to the time frame of the chart or even in the pair that you’re trading?

You see, if you’re trading on the Euro/New Zealand (EUR/NZD), for example, the movement in that is massive in comparison with a pair such as the Euro/British Pound (EUR/GBP). So, if you took a 20-pip stop loss on the Euro/Pound, that’s a reasonably big stop-loss for that particular pair because it doesn’t move much. However, if you put a stop loss at 20-pips on the Euro/New Zealand (EUR/NZD), that’s like the spread plus a small movement and it’s wiped you out of the trade.

So, you need to understand what time-frame chart you’re trading, what currency pair you’re trading; the reasons you’ve taken the trade; why did you take the trade? Look for things within placing your stop loss – things such as the price itself – what level is the price at? What’s the actual number of the price? When you’ve taken the trade, where do you want that stop loss to be? Not just 20-pips but I want to have it protected, let’s say if I’m buying a trade, I want it below the last swing-low or I want it below the pivot point or a previous support and resistance level or a round number or the candle-setup low – if you’re taking a buy trade.

Standardise your Approach, not your Stop Loss

So, think about your stop loss not in terms of “It’s always going to be 20-pips or it’s always going to be 50-pips”, but for this particular trade and this particular setup, on this pair and on this timeframe, it needs to be here! And, from there you then work out your position size!

So, once you understand the pair that you’re trading, the stop loss amount – you can then calculate your position size or your lot size – and I’ve got a great free tool available on my site, if you don’t know how to do that. And what that allows you to do is to control your risk. So, every trade has an equal risk on it – so,