How to set a stop loss
A stop loss order is the main way to reduce losses when trading forex; in fact, it is an order to
force the closure of an order if losses have reached a certain limit. This approach will save the deposit from being completely drained.
The question “How to set a stop loss” worries every novice trader, so in this article I will try to describe the solution to this problem in more detail.
There are several options for setting a stop loss order, all of them are based on different principles and each trader chooses the most suitable one for himself.
Professionals say that the basis for placing stop orders should be the market situation, but there is an alternative.
And so let’s look at the most common ways to set stops, depending on trading conditions.
How to set a stop loss for the market.
In this case, the main indicator on the basis of which the stop loss value will be calculated is a correction or rollback against the main trend.
Analyzing any chart of a currency pair, jumps in the exchange rate immediately catch the eye, so our task is to ensure that the order does not close prematurely as a result of a rollback.
The magnitude of the correction is determined visually or by plotting a channel; the stop loss setting point should be several points below the calculated minimum. That is, the order is triggered in the event of a breakdown of the price channel against the trend movement.
For example, if the price retracement on your time frame is 20 points, then the stop loss should be at least 25.
This is, so to speak, the most correct option, but you should not forget about monitoring the market situation; if it changes, you can close the deal earlier, and if you make a profit, on the contrary, move the stop loss to the break-even zone.
Based on the deposit amount.
This method is the safest, thanks to it you can maintain the planned level of losses. But, unfortunately, the size of the deposit does not always allow you to use this option.
Recommended losses from one unsuccessful trade range from 2 to 5 percent, but if with a deposit of $100 you are trading with a volume of 0.1 lot, then you will have to set the order at a level of only 5 points. What is simply physically impossible to do, because you should also take into account the size of the broker's spread.
Therefore, in this case, we adjust the level of losses based on our capabilities and market dynamics.
In a fixed size.
This approach is mainly used by novice traders, but surprisingly sometimes brings good results. The order size is simply set at random, for example, 15 points; the take profit is also set at the same time, but it must be at least one and a half times larger, for example 25 points.
If you guessed the size of the orders, then at least half of the transactions will be closed with a profit, as a result, twenty open orders will bring 100 points of profit.
A rather controversial option, but it also has a place, the main thing is that the size of the established stop is not excessively small.
Using special scripts.
Quite a few scripts have been created that allow calculating stop loss using given parameters:
- Automatic stop loss and take profit - http://time-forex.com/skripty/automatic-stop
- Script for moving stop loss - http://time-forex.com/skripty/stop-loss-move
Setting a stop loss correctly is already half the success, therefore, in order to choose your option, try all the methods on a demo account and, if necessary, make your own adjustments.