How Big Should Your Stop Loss Be?
In this weekly video:
00:33 – What size should your stop loss be? It depends
01:10 – The way I like to trade
02:30 – You need to factor all those things together.
03:44 – Adjust your position size – use my free lot size calculator
04:27 – Should you use a trailing stop instead?
05:30 – Don’t simply move your stop loss to breakeven
06:08 – A set and forget approach
How big should your stop loss be as a Forex trader? Let's talk about that and more right now.
Hey traders. Andrew Mitchem here, the Forex trading coach. Video and podcast number 225. In this episode, I want to talk about a really important subject. It's all about, how big should your stop loss be?
What size should your stop loss be? It depends
My initial answer is probably not what you wanted to hear. My initial answer would be, it depends. It depends on a lot of things, so I can't give you a straight number of pips answer. I'll tell you why shortly. Stop losses, they're really important. In my opinion you should definitely use one. Some people say, “Don't use them at all”. They say, “If you don't have a stop loss you can't get stopped out of the market”. The problem that I see with that is that, that's fine in theory. The problem is that one or two bad trades that goes against you, and it just keeps going. Those are the trades that can do some serious damage on your account.
The way I like to trade
The way I like to trade is, I like to have a controlled and equal risk on every trade that I take. It doesn't matter what the strategy, what the time frame or the chart is. What the currency pair is. What the day of the week is. What the direction of the trade is. It doesn't matter. Therefore, when I'm taking those trades, I need to know the size of the stop loss. But I don't just take a generic stop loss. I don't say, “This trade is going to have a 30 pip stop loss”, or, “This trade's going to have a 50 pip stop loss”. You can not trade successfully like that, because a 30 pip or a 50 pip stop loss doesn't mean anything.
The stop loss size of your trade needs to be determined by a few things. One, your overall strategy. Two, the currency pair you're trading, because of course different pairs have different movements, so different amounts of move within a day. As an example, if you were trading the Euro and British Pound, vastly different to have a stop loss of 30 pips on that, as opposed to the British Pound and New Zealand Dollar, which could move 200 or 300 pips in a day. As opposed to the Euro/Pound that might move 50 pips in a day. It also depends on the time frame of the chart you are trading, and it also really importantly depends on the current market conditions.
Always place your stop loss at a level that protects the trade
You need to factor all those things together. What you should do is, always place your stop loss at a level that suggests that if that level gets hit and the price gets to that level, you accept that you're wrong, the trade is wrong, the set up is wrong. Whatever it might be. You accept that you take a loss on that particular trade. That's how you should place your stop loss. The level that gives the trade room to breathe, room to move, but also says that, “If it gets to this level, then I'm wrong”. That's fine. You're going to be wrong as a Forex trader. No one is 100 percent accurate all of the time. Having a stop loss at that level that's a safety buffer, a safety level.
Once you have that, you can then calculate the stop loss size in pips, but it should never be just 30 pips or just 50 pips. It should never be a set level depending on what pair or what time frame you're on. You shouldn't do that. You should put that stop loss there according to that actual trade itself. That's why my answer is to, “How big should your stop loss be?”, is, “It depends”. Because it really does.
Adjust your position size – use my free lot size calculator
Once you've calculated that stop loss size, you then need to adjust your position size, the amount of lots that you take on that trade, to ensure that if that stop loss gets hits with this position size, I lose X percent of my account. In my cases, always no more than half of one percent of my count. 0.5 percent of my account gets lost. It's only half of one percent. That's the maximum. You can use my free lot size calculator. What I will do is I will put a link below this video to the lot size calculator. If you don't have it, make sure you get a copy. It works on any MetaTrader 4 platform. It's a brilliant piece of software. It's yours free of charge. Use it, and use it to your advantage.
Should you use a trailing stop instead?
Moving on from a fixed stop, a conversation that I had with my clients on my live webinar just last night was all about the use of a trailing stop. Personally, I'm not really a fan of a trailing stop, because again it's like, do you choose 20 pips to trail, or 50 pips, or whatever is should be? It's a hard thing to actually determine.
I would personally, and this is what I suggested on my webinar, I would personally say that you either look at, if you move into profit. Your trade's into profit. It hasn't got to your profit target yet. You've got a few options. You could look at closing part of that trade out, to guarantee that you've locked in some profit, and the rest is still in the trade. You could move your stop loss up to a fixed level. In my opinion that's a better way of doing it. A combination of closing part of the trade if you wish to, and/or moving your stop up or closer to the entry point, and then into profit by using fixed levels rather than trailing stops. By that I mean look for previous swing highs or lows or round numbers, etc.
Don’t simply move your stop loss to breakeven
Don't just move your stop to break even. Because really, break even doesn't mean much. It's just a feel good thing. It just makes you feel good because you know you can take a zero loss on that trade, or you might make a small profit or a small loss.
Break even isn't particularly that good a position for a stop loss. Depending of course on the price at that time. But I would rather move your stop up to certain levels, keep moving it up if you need to. Locking in some profit. Guaranteeing some profit, and keep moving it according to previous price action if you with to do that.
A set and forget approach
The other option of course is you take the simplistic approach of set and forget. You say, “This is my stop loss. This is my profit target. I will let the market do its thing”. To be perfectly honest, in a lot of cases, that often is the best way to trade because it takes your emotions out of the trade. You know the very worst you can do. You know what's going to happen if you get to the profit target. You leave the trade alone.
Different types of ways of trailing stops and moving stop losses if you wish to do that. But overall, think about your stop loss for the safety of the trade. Adjust your position size accordingly, and use my free lot size calculator. A link will be below this video.
This is Andrew Mitchem, the Forex trading coach. Have a great weekend. I'll see you this time next week with some more trading tips and information. Bye for now.
Thanks again, I'll see you this time next week.