Best stop loss size
One of the most important aspects of Forex trading is risk reduction; poorly timed trades are the main cause of large losses.
To combat losses, a tool known to every trader was invented - a stop loss order.
To be more precise, it is one of the settings that is set when opening a deal in the new order panel in the trading platform.
There is no doubt that you need to place a stop loss; the whole question is the size of this order.
There are a lot of options based on which each trader independently chooses the appropriate option for his strategy .
Today we will get acquainted with some of them:
- Correct stop loss size
- Based on loss planning
- At strong levels
Correct stop loss size
One of the rules for placing this order states that its size must correspond to the market situation, only in this case the transaction will not be closed prematurely.
Therefore, proponents of this method set the stop loss size based on the size of the correction , so that a short-term rollback does not force a promising deal to close:
The lines of the price channel created based on the lows and highs of the price on a given time frame can also serve as reference points.
In fact, this is really the most correct option, since you set the stop not according to some of your beliefs or preferences, but according to the market.
True, from here the conclusion follows that you need to monitor the situation on the market and if it changes, you can change the size of the set stop loss.
Based on loss planning
At its core, this is the simplest option, based on planning acceptable losses from one transaction, for example, no more than 1%.
In this case, there is no need to analyze the market situation; it is enough to calculate how much this same percentage of the deposit will be in points for the current currency pair.
For example, we have 10,000 US dollars on our account, 1% of this amount is equal to 100 dollars, and 1 point on the EURUSD currency pair with a volume of 1 lot is equal to 1 US dollar.
That is, based on our tactics, the size of the stop loss should be equal to 100 points.
It is clear that the method is not entirely scientific, but at the same time it is often applicable in practice, especially when there is no time to analyze the market situation.
At strong levels
This option is suitable for long-term trading, when using breakout strategies or when the price is near one of the strong levels.
Stop loss is set not by size, but by focusing on the level after which the price is likely to continue its movement.
Such levels can be simply round price values – 1.20; 2.00 and price values at which the price often made a reversal.
Usually the stop loss is placed a little further than a strong level to avoid triggering a false breakout.
For example, the current exchange rate of the EURUSD currency pair is 1.21325, there is an upward trend in the market, we open a buy transaction, and set the stop loss size at 1.19900 dollars per euro.
Using one of the presented methods, you should not forget that the price moves, and after it the size of the stop loss should change.
Why lose the profit made if the lows and highs have changed and the price has moved far from the opening point. In such cases, it is recommended to use a trailing stop or manually change the size of the stop loss.
Related articles:
- Automatic stop loss installer - http://time-forex.com/skripty/automatic-stop
- Stop loss move script - http://time-forex.com/skripty/stop-loss-move
- Stop loss technique http://time-forex.com/praktika/tehnik-stop-loss