How to set a stop loss on Forex?
What is stop loss? How to set a stop loss correctly? What are the recommendations for the installation of stop losses? You will find the answers to these questions in this article.
Hello gentlemen traders! Placing a stop loss is probably not the most interesting topic to discuss, but it is crucial. If you do not know how to set a stop loss, it will be very difficult for you to succeed at Forex. In fact, for a trader, everything depends on the correct placement of the stop loss and risk management . If you understand these two aspects of trading and how to approach them correctly, making permanent money in the market will be much easier for you.
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What is a stop loss?
Stop loss is an order that you place with your broker to close a deal at a certain price. Stop-loss is designed to reduce the losses of the trader, if the price went against you. It is also very convenient to use a stop loss, as it is activated automatically when the price reaches the level you have placed, so you do not need to sit in front of the computer and monitor the transaction.
How to set a stop loss?
The first thing to understand in setting stop loss is that you should never place a stop loss based on a random number of points. Many traders use fixed stop losses - 20 points or 50 points, etc. This is a wrong stop loss placement, professional traders set a stop loss differently.
Stop loss should not be based on a fixed number of points, but on support levels / resistance . If you buy, the stop loss should be placed 2-3 points below the support level so that it does not accidentally catch the price. If you sell, the stop loss should be set 2-3 points above the resistance level. Consider a few examples of stop loss placement.
In the first example, you see the placement of a stop loss with an arbitrary amount in points, the second example shows a stop loss set below the support level. Signal to enter was the formation of a bullish pattern Pin-bar, based on the level of support. Note that in the first example, the trader placed his stop loss at an arbitrary distance of 50 points from the entrance. Traders usually do this because they do not understand how to place stops correctly, and also because they want to trade with a large position size. This is not true. You need a reasonable reason for placing a stop-loss, and not just a random distance in points, which will allow you to trade the lot you need. Note that this trader worked stop-loss before the market went up.
In the following chart, we can see how this deal worked for a trader who knew how to set stop losses correctly. Note that the stop loss was set at a key support level and below the minimum of the Pin Bar, giving the price free space for fluctuations, but at the point that closes the deal if the price goes beyond the level.
But how to set a stop loss when there are no key levels nearby? In this case, the ATR indicator (14) will help you - the average true range, which shows the average volatility (price change) over the past 14 days. The example below shows how to use ATR to place a stop loss, and how it can keep you in a trade, despite unstable price fluctuations after the pattern is formed.
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Important Stop Loss Tips
- Before opening a transaction, it is important to consider how much profit you can make. If the stop loss turns out to be too broad, while the potential profit for the transaction is expected to be small, and it does not block a possible loss, then this is not the best idea to enter the trade. Profit on the transaction should exceed the size of the stop-loss at least 2 times (ideally 3 or more times);
- Stop loss must always remain constant and cannot be expanded. If you see that the price has come close to the foot, and the deal will now be closed at a loss, then so be it. It is better to enter the trade again next time if there is a signal than to hold the losses;
- We welcome the transfer of the transaction to breakeven and the use of a trailing stop. For example, if the price has moved a distance equal to the stop loss to the take profit, then the transaction is recommended to be transferred to breakeven. Even if the price unfolds, you will not lose anything. And the preservation of capital, as you know, is a priority task in trading, and only then is its multiplication going on.
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Proper installation of stop losses is the starting point for successful Forex trading. Knowing how to set stop-loss gives you the ability to correctly determine the size of the position and receive less losses on your strategy . Traders who do not attach importance to proper placement of stop-loss or do not use stop-loss at all in their trade, are doomed to failure. Please note that this article is intended for traders who trade on charts with high timeframes (from H1 and above), and the described rules for setting stop-loss are not applicable to younger timeframes, since for beginner traders, scalping and trading on minute charts is not recommended from - for excessive risks.
Read also the article “What is a Forex candlestick analysis?” .