Hello and welcome to another edition of the bulls versus the bears. Today we are going to talk about how to place stop losses the right way. Now placing stop losses are not very popular among traders but we do need to talk about it. Stop losses are the big elephant in the room no trader wants to talk about.Sure we do have to make profits. But you do need to watch your back when the market does a 360 on your trading position. It’s absolutely crucial that you master the art of placing stop losses. Because if you don’t your trading account could suffer nuclear-sized losses that will make your head spin.
Aside risk management, your prosperity as a forex trader hinges on you placing stop losses the right way. If you are able to master the art of placing stop losses, life will be a whole easier for you.
First things first
One Thing You Need To Drum Into Your Skull About Placing Stop Losses The Right Way .
One important thing you need to drum into your skull about placing stop losses the right way is that you can’t be picking up random amount of pips like you’re buying candy from a candy store. Sure you might think putting 20 pip or 50 pip stop losses may be the right thing to do. But Newsflash! It’s not! Even worse, it’s not the professional thing to do as a trader either. You should base your stop loss on a level in the market. In other words, price will have to breach a certain barrier to make a fool out of your trade. It’s almost like playing truth or dare. Basically you want price to prove to you that your initial trade was wrong. That proof can be found in what we call the most logical nearby level of support / resistance, assuming it has been breached.
Let me give you something else to chew on while placing your stop losses. You need to understand the market you are trading in and determine what key level price has to breach before rendering your initial trade completely useless. Let’s take a look at two examples.
First image please:
Here is a classic example of a stop loss gone bad while trading the GBP/USD pair.. A stop loss is nicely placed at the 1.5150 mark which adds to 50 pips. Unfortunately for the poor trader, he missed out on a 100 pip payday, as indicated on the price chart. The moral of the story is you don’t just do a hail mary by placing a stop loss just for the sake of it. You must find the nearest key level to place your stop loss, or else your trading position will be toast.
Now let’s look at another image where the stop loss is placed at a key level the right way using the USD/CAD pair.
Now this is a pin bar pattern where the stop loss is placed at a key level of support the right. Unlike the first graphic the stop loss is placed at the most logical nearby key level,e pin bar. beyond the low of the pin bar. In this scenario, you save yourself from impending doom. Even more important you are given your trade more time to work its magic and give you more profits. At the same you are putting your stop loss at a place that will render your trade null and void in case price moves beyond it. In other words, decide how much you can afford to lose.
Beware Of Last 7 Days of Average Market Volatility
Ever heard of Beware of The Dog? The same sign applies to the forex market’s market volatility. You absolutely have to beware of the last 7 days of the forex market’s average volatility or Average True Range. By volatility I refer to the periods when the market is on a high and when it’s on a low. Now why all the fuss? Because you want to calculate your stop loss market’s true range. Failure to do so could result in your stop loss taking a severe hit. Now some of you may be wondering ” may be wondering “What in the world is Average True Range?” Well the Average True Range measures the forex market’s average volatility over a fixed period, in your case 10 days.
Now let’s see how the ATR looks like on your price chart
This is nice-looking price action involving the EUR/USD pair. The zig-zag lines at the bottom of the price action represent the ATR. Now the red arrows pointing at the peaks reflect the periods when the values are quite high.This represents the market volatility that I’ve been harping about.. And the corresponding red circles encircling the volatile candlesticks correspond to the periods of volatility.
Now how do you fill your ATR values on your MT4 account? Simply go to and then select the indicator then sets it to default 14 day period option. But since we are dealing with 7 days, you go to the bottom of the screen with your cursor and select <ATR14 Properties>. You should see the following popup window as shown below:
You then look out for the <Parameters> tab as shown in the top far left hand corner. Next, you look out for the field labelled Period and change the default 14 to 10;since 10 days is the period of volatility that you will be working with. Hopefully you wont be pulling your hair using this tool.
Stop Loss Placement Tips To Keep In Mind
When placing your stop loss you’d do well to consider the risk reward and profit potential of the trade before taking the trade. If you find your stop loss too wide for your trade to create enough leg to operate , and the risk reward doesn’t add, up, I suggest you keep your cash in your pocket. Or else you’ll be gnashing your precious teeth.
Yes, risk reward and position sizing are related to stop loss placement. They are almost like Siamese twins. But you need to remember that stop losses take precedence over profit targets. In fact stop losses are a prerequisite for your profit target and risk reward. And they also help weed out trades you should jump on like Speedy Gonzales and trades you should outright reject.
Even more important, you should always keep your stop losses constant. And you can’t keep them so wide either. Keep your stops wide, and the market will blow by you like Speedy Gonzalez and smash your trading position like a ton of bricks. So you tighten your stop losses, and place them around the key levels. Even more important, make sure that your stop loss strategy is part of your trading plan. For your own trading sanity it will be in your best interests to make your stop loss strategy part of your trading plan. Or else, your trading account will suffer excruciating pain.
Stop loss placement is as crucial to risk management as apples are to oranges.Once you identify your stop loss placement you can then establish your position size and then know in advance the costs and risks of your trade. Think of stop loss placement as a cost to doing business as a trader. Also think of stop loss placement as your cue to exit a trade when the trade heads south.
The same way you exit a building at the speed of light when there is fire, you use that same speed you to exit a trade. Sure, your emotions may persuade you stay in a trade even if it’s going to blow a hole in your trading account. But your peace of mind knowing that you are saving your account from imminent obliteration is just as important.
That’s a wrap for ”How To Place Stop Losses The Right Way”. If you get your stop loss placement right you are on your way to forex prosperity. Getting your stop loss placement right gives you the freedom to calculate your profit targets on trades and position sizes.Even more importantly, you get to put your trading edge into action with your mind clear of clouds You also develop emotional control.. You’d be better off working out your stop loss first before anything else or else your trading account will be screaming “911.”
Til next time take care.
Looking To Join The Forex Trade Gravy Train?
If you’ve stumbled in here looking to join the forex trade gravy train, here is what you need to do . First, look up Why Forex Trade Is So Popular. Next, you learn the fundamentals of forex trading by reading Forex Trading Basics – Top To Bottom Part I and Forex Trading Basics – Top to Bottom Part II .
Next, you need to learn how to read candlestick patterns. They are the main feature of price action analysis. And you need to know what these patterns are telling you. To be able to do that read the following on Fundamentals of Reading Candlestick Patterns, Single Candlestick Patterns, Dual Candlestick Patterns, and Triple Candlestick Patterns . Also You Need To Know Ten Of These Candlestick Patterns .
And finally If you want to give your trading skills an edge by relying on pure price action trading/analysis, instead of fancy forex robots and fancy indicators, get started with What is Price Action Trading?
Looking to get a leg up on price action analysis,?you need to learn How to Identify Support and Resistance Levels. And if you want to learn how to interpret trading zones, read up on Identifying Dynamic Support and Resistance Levels. Finally you should know How To Read Candlestick Patterns using Support and Resistance Levels.
However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch of several weeks, consult How to Spot High Probability Trades. And if you are still not sure about price action trading, find out Why Price Action Trading Still Rocks . Dont let me stop you from reading the other posts as well. But the suggested posts above are the most important posts to get you started.
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