How to place stop loss correct is one of the most important problems of new traders. We need to talk about a how to place stop loss correct and we need to talk about the mistakes that most of the beginner traders are doing. Stop loss is also known as SL order (stop loss order).
If you want to be a profitable trader into the long run, than you need to use a good risk management for your account. This means that you need to calculate every time your lot’s size according to your account’s size, and check if the next trade that you want to open fits with your own rulles.
For example, if you see that for the next trade your SL is wide (70 – 100 pips for intraday trading) and you don’t want to exceed 2% from your account, you might skip this particular trade and start looking for the next one. This is what it also means to know how to place stop loss correct.
Off course you also need to keep in mind risk/reward ratio. For example you don’t want to open a trade with 40 – 50 pips of stop loss (SL) for 10 pips of take profit (TP). A very important rule that you need to know is that always, and I really mean always, your stop loss and take profit must pe set with a technical reason.
Usually, for a buy trade you need to put your SL few pips (4 – 7 pips) below the support zone and take profit few pips (4 – 7 pips) below the resistance. For a sell trade, you need to put your SL few pips (4 – 7 pips) above the resistance and take profit few pips (4 – 7 pips) above the support. Keep in mind that once you’re in profit 10 – 15 pips you can scale out (close a part of your trade) to secure some profits and depending on your method you can also move your SL to break even (BE) + 1 pip. This is called a risk free trade (after you moved your stop loss to break even).
If you don’t use a proper stop loss (don’t know how to place stop loss correct), a proper lot size and a proper risk/reward ratio it will be just a matter of time before you erase your trading account. And when you’ll wipe your trading account, there is a question: with what will you trade?
There Are Two Big Mistakes Made By Traders When They Place Their Stop Loss
- Trading without or with a huge stop lossOne of the biggest mistake that you can do as a new trader do is to trade without SL, or with a huge stop loss. This behaviour appears because the you are scared to be stopped out from the trade. In some happy cases you will use a small position which protects you from big loses but in the same time with small positions you will earn small profits, no matter how many pips the price will go into your direction.Obvious when you will use big lot sizes there will be also big loses because of the fear which stops you to make the right decision.
The right thing to do is to use a proper lot size according with your method (this mean that you need to find a trading method which fits you, here you can find the method that I use). The SL should never be higher than 2 to 5% from your trading account equity.
A wider stop loss is dangerous because if it will be hit it will take out from your account a good part of equity. In the same time you will be limited by opening new positions which can bring profit because of free margin which is limited by the previous opened positions.
There’s no point to use a wider SL just to watch to price going against you, with the hope that the market will turn into your direction. This type of trading it’s not productive, it’s actually pointless. It will simply take you nowhere.
This kind of mistakes can also appear because of using too tight Stop Loss.
- Trading with too tight stop lossAfter you understand the importance of using stop loss you will start to use it, but you will also be tempted to use a stop loss which is too tight so you can limit your loses. When you do that, you will be stopped out very often only to see that the market will turn around in your initial direction.This is the moment when you will think that your broker chase your stop loss and it may not be the case. In this case the stop loss will be executed because you didn’t left enough room for the price to move. Your stop loss shoud be placed only because of a techincal reason (for example above (for a sell position) / below (for a buy position) the last relevant swing)and should be hit only if the price action invalidates your setup. This means that there a only few chances for the price to goes back into the initial direction. Keep in mind, that you need to let enough space for the price to make his moves before it goes into your direction. It’s something normal for the price to move side ways for a while, before and after you make your entry, untill it makes a bigger move.
If you are stopped out after just a few minutes you opened a trade and this happens to you all the time, then I strongly advise you to open a demo account and train yourself as much as you need before you go back to a live account.
So, if you want to be a profitable trader into the long run, and if you want to avoid all the pain caused by not knowing how to place stop loss correct, take your time and learn how to “read” the market. Find a got trading method and make some backtest to see how the price reacts. Train yourself on a demo account and when you feel you’re ready, you can go on a real account. Remember, the market will always be there. There’s no point to rush to loose your money before you learn how to earn it.