The 6 Things I Always Do When I Set My Stop Losses
This is one of the biggest mistakes I see traders make.
So many traders starting out tend to think of this as more of a guideline than a set rule.
And it’s why so many of them lose money.
What am I talking about?
After spending a few years in the currency markets, I can’t even begin to describe how many times my stop loss strategy has saved my bacon.
In fact, I’ll go as far to say that the way I set my stop losses is part and parcel of why I make money in the markets.
That’s why today I want to show you the 6 things I always do when I set them, and how you can too.
Let’s get to them.
How To Protect Your Forex Trades
As Forex traders, we simply won’t get every call right.
That’s a fact of the market.
Fighting this notion is a losing battle.
So naturally that means we need a way to protect ourselves when things go wrong.
That’s why we have stop losses.
And a good stop loss strategy will help you limit the downside of any trades that go against you, and save you money in the process.
Here’s 6 things you need to do when setting your stop losses on your Forex trades:
Stop Loss Rule #1: Stop The Squirm
I like to place my stop loss somewhere where I think I know the market will never reach within the time frame of my trade.
This is my most important rule.
That feeling of entering a stop loss and then squirming around in your chair, hoping that the market somehow does not hit the stop loss with a moment of random volatility that neither you nor I can predict, is a sure way to lose your hair during your experience as a trader.
Stop Loss Rule #2: The Psychological Factor
I place my stop loss at a level on the chart so that when the market does hit the stop loss, I know I was wrong.
Psychologically it should be a relief that you’ve placed a stop loss at the level which you did.
Stop Loss Rule #3: The Reversal Range
I place the stop loss at a point on the chart that would indicate a reversal of my previously expected direction of trade.
When a technical pattern develops on the charts and signals an entry pattern, the stop loss should be entered somewhere where you know that the technical pattern would no longer qualify should price reach the stop loss level.
Stop Loss Rule #4: Ignore These Two Things
Don’t place the stop loss at major support and resistance levels.
I usually give myself 50 to 100 pips breathing room for a stop loss above or below a big resistance or support level.
This provides enough distance to avoid getting stopped out on market volatility.
Stop Loss Rule #5: Risk The Right Amount
How much is the right amount to trade?
This depends on your strategy and risk tolerance as a trader.
I personally don’t risk more than 2% of my account in any one trade.
The usual amount of risk I take per trade can be anywhere between 1% and 2%.
Stop Loss Rule #6: Don’t Risk Too Much
Position sizing is crucial in trading.
Risk too much and a short series of trades can wipe out your portfolio.
Risk too little, and you’ll find growth hard to come by at the rate you want.
That’s why I have a specific amount I like to risk in any one trade as I mentioned above in rule #5.
But there’s also a threshold I don’t like to go over either.
I don’t suggest risking more than 10 percent of my account at any particular time in any one trade.
Limit The Risk On Your Trades Like A Pro
Setting stop losses is a must for EVERY trader.
Not doing so is just flirting with disaster, and you’ll end up losing money in the currency markets.
That’s why you need a solid stop loss strategy you can use to limit the risk on your trades.
Remember, you want to place your stop loss at:
- A point where you think you know the market will never reach within the time frame of your trade
- A level on the chart so that when the market does hit the stop loss, you know you were wrong
- A point on the chart that would indicate a reversal of your previously expected direction of trade
- At a level that isn't a major support and resistance level
- A point that means you risk the right amount (I personally stick to a 2% rule)
- A level where you never risk more than 10% of your account at any particular time in any one trade
Stick to these 6 stop loss rules and you’ll limit the downside of any trades that go against you, and save your account & money in the process.
Until then here’s to profitable trading.