There is a tool every trader must know. A tool on how to control and consider the risk they can accept in one transaction. It is called a Stop Loss Order (SL). A SL order is an automated order so that the trader may leave on their platform after opening a new position.
This Stop Loss Order tells the broker when they should exit the market if the trade does not turn out in the trader´s favor. You can enter this value as a general percentage of the trade or value of the dollar or in pips.
Every forex trader must use Stop Loss Orders. This type of order prevents losing all your balance in a couple of transactions. You see you could spend 6 months building a good account size, and blow it all up because you forgot to use a stop loss order in just one trade.
They are also very important as a guide for planning a risk-profit relationship. Therefore, the main advantage is that you set the maximum amount of loss that a forex investor is willing to absorb in a position, without compromising the entire capital or a higher risk as defined by your strategy.
However, the main disadvantage is that if such orders are not placed in appropriate levels, it may lead to traders taken out of positions ahead of time or even just when the market was about to reverse to a profitable position .
So in this situation, the following question arises: How to place a stop loss order?
That only depends on the trader…Only you have the answer. This is because we do not all have the same account size nor the same risk tolerance level nor the same strategy. All this, because our money is managed very differently, and remember that psychology plays an important role also.
But even so, there are general guidelines that have been shown to be quite effective and useful that can help us in the way Stop Loss Orders should be placed.
Below we will talk about three different ways on how to place stop loss orders.
1. Most traders usually set a percentage of their account as an acceptable loss. So if you have $ 10,000 in your account and you never want to lose more than 5% in a certain trade, your maximum loss should be $ 500. This is step one and the most basic part of placing stop loss orders.
We must determine our percentage of risk, which should preferably be in the range of 1% -2%, but if you have confidence in your strategy you may raise the risk to 3%, and in extreme cases to 5%. There is so many online forex course available there you can find how to minimize the risk level.
For example, for an account with a balance of $ 10,000 USD, we represent 3% of risk = $ 300. Therefore, a need to adjust your stop loss order for this mode to never lose more than $ 300 per transaction or 30 pips. (Assuming it is a normal account in which each pip is approximately equivalent to US$ 10.00)
Here are 3 possible scenarios that comply with our 3% rule depending on type of account and number of lots:
30 Pips = USD $ 300 on a normal account where 1 pip = $ 10 USD
300 Pips = USD $ 300 on a mini account where 1 pip = $ 1 USD
100 Pips = USD $ 300 on a mini account where 1 pip = $ 1 USD, but multiplied by 3 lots of 100 pips each. (Used for taking different profit levels with each lot)
The size of the trade should be adjusted so that the risk is 3% of total batch operated.
See below example of a long trade on the 1 hour USD/CHF chart with a 30 pip SL.
2. If a trader decides to enter the market in short time frame for intraday trading, he must respect the day of closing the trade. That is, respect the stop loss order.
This means that you must close before the “deadline”, or will become a very unpredictable position (because the market is much different than it was at the time that you entered the trade).
After taking the initial position and planning your trade, you must follow the market events and technical indicators to adjust your SL orders. The most important rule is to adjust the loss / gain over the time frame in which you entered the trade (or a larger one).
Usually if I take a medium term trade (2-4 days) I will try to reduce the stop loss and target it for 10-25 pips every day.
You should also be monitoring global events, because every important event can hurt your position.
If the reward ratio is quite high, I try to move my order above the point of entry, making it a safe position to be in. The idea here is to find a balance between greed and caution. But if the trade goes wrong, one should think about cutting losses.
In addition, the trader should always remember that if the market suddenly begins to react violently, you should be even more cautious or even get out of the trade.
3. We can use a key indicator that is not 100% accurate but may be sometimes, very precise: Fibonacci Levels. These may give us a hint of when the market will reverse.
By using Fibonacci to place your stop loss order, you can prevent further losses, for example the case of USD/JPY is moving from 98.69 to 99.75. This gave us three levels where the market may retract 99.10 (38.2%), 99.22 (50%) and 99.34 (61.8%). In this example, the trader entered the market a little ahead of 38.2% at 99.13 and put his SL order in SL 98.94 just below 23.6%. The trader could easily have used a few pips below the Fibonacci instead of the exact price of the wick that took him out and then continued on to be a profitable trade.
The problem is that if you do not have an account that can tolerate the risk margin, it is better not to enter into the trade. No matter how beneficial the trade, remember to ask yourself these questions: How much money can you make and how likely is that the market is moving in the direction you want? And therefore, can you tolerate that risk for placing the stop loss order a few pips above or below an important support / resistance level. At this time you need the help of forex signals.
The question you are probably asking now is which method is best. Well, there’s no right answer to this. It will depend on many factors such as personal preferences, the size of your account and what strategy you have for best results.
The first rule I learned in forex is to be able to let go. It often happens that the market is volatile and so the risk is not acceptable to the size of my account.
Yes, these are the times you can make more profits that you normally could make, but these are also the times that you can lose a lot more money than you could win.
