How big a stop loss should you use when you're trading Forex?
In this video:
00:41 Trading Stop Loss
04:06 Does Stop Loss Matter?
How big a stop loss should you use when you're trading Forex? Let's talk about that and a lot more right now.
Hi, Forex traders. Andrew Mitchem here, the Forex Trading Coach, and today is Friday, the 18th of September. I've had a question from Yoshino from over in Japan and Yoshino has said to me, “Hey, Andrew can you give me some advice? I'm looking to trade with a 10 pip stop loss on a 20 pip profit target but I'm not making money and can you tell me what the ideal stop loss on that is in pips?”
Trading Stop Loss
I've gone back to Yoshino and said, “First of all, what you should do is jump onto one of my webinars because in that you'll see that personally I don't even worry about how many pips I'm risking or how many pips I'm making for that matter.” Because to me the way I trade with money management is just not relevant. It's something that unfortunately so many people get wrong in their trading and it's because everywhere you go out there on the internet land, it's just everybody's telling you, “This is how many pips this system makes or this robot makes or this indicator makes, et cetera.”
They're all saying, “You want 15-minute time frame chart, use a 20 pip stop loss.” It really is completely wrong because what you need to do is put your stop loss at a level that protects that particular trade. Now, that particular trade you're going to take for whatever reason, according to your strategy and your criteria for entering a new position, but your stop loss needs to protect the trade. It needs to give the position room to move, room to breathe. You don't want to put your stop loss so close that it just gets stopped at all the time because spread has to come into account and different currency pairs have different spreads and spreads alter slightly depending on the time of the day and the volatility and the activity in the market.
Different currency pairs also have different movements, so if for instance you had a 20 pip stop loss on the Euro/Pound (EUR/GBP), that could be seen as a relatively big stop loss as opposed to a 20 pip stop loss on something like the British Pound/New Zealand Dollar (GBP/NZD), where that just moves hundreds of pips per day. It's all relative to what pair you're trading, what time frame chart you're trading, also. When I say you need to have a safe level to protect the trade, what I mean by that is that you might want to put your stop loss, let's say you're buying, you might want to put your stop loss below recent swing low. You might want to put it below a pivot point. You might want to have it protected by a round number.
Whatever it is that you look for, rather than just saying 20 pips or 50 pips, your blanket standard, look at altering the stop loss to actually protect the trade, but also, the actual trade that you take should determine your stop loss and also, that then leads to having a high reward-to-risk out of the trade. Now that leads in really nicely to an amazing trade that I got shown last night on a webinar that I held for my clients. It was from a client in Australia who made a 7.3 to 1 reward-to-risk on a trade on silver, 7.3. Quick numbers that tells me, what's that? That's about a 3.6 return on that account, 3.6% return. If you're risking half of 1%, those 3.6%, it's a huge return for one trade, 7.3 to 1, so for every one dollar he risked, he made $7.30 return. You can just see it's just an incredible trade.
Does Stop Loss Matter?
But the stop loss doesn't matter. The stop loss was placed for a protective reason. I think it was actually below a round number which happened to be a swing low at the same time. But it just goes to show that if you have your stop loss in there for a reason, then you give yourself such a good likelihood of protecting that trade and allowing the trade to move on in the ideal direction. I hope that helps. It really is a slightly different way to … The majority teach you about stop loss placement and also profit target placement for that matter. It's really important that you understand that concept. Try to get away from the fact that I'm going to take a 20 pip stop loss because it's the Euro/Pound or it's the Euro/US, and it's a 15 minute jump.
It doesn't matter. If the Euro/US (EUR/USD) is moving massively, your 15-minute time frame stop loss may need to be 10 pips, 20, 30, 40, 50, 100. Who knows? It depends on what's happening at the time. It's really important to understand that concept. If you'd like to know more about that and also the way, Bill, I trade, and how I can help you become a profitable trader, jump on to one of the free webinars that I hold each week.
Two Trading Webinars To Checkout
Two different kinds of webinars, one for new traders and one for people who've been trading 6 months or longer, more experienced traders, but also potentially more frustrated traders.
If you're at that stage where you're just not getting it and you're ready to give up, then before you do that, jump onto one of those webinars that I hold and I assure you you'll find them very, very useful. That's it for now. If you have any questions regarding trading that I can help you with on future videos and podcasts just like this, just email me – [email protected] and I'll be glad to help answer those questions for you and help you progress further and further within your Forex trading.
That's it for now. Have a great weekend. Look forward to catching up with you this time next week.