Should you use a Stop Loss?

In this video:
00:35 – Always use a Stop Loss
02:04 – Every trade should have the same risk
02:30 – Where to place your Stop Loss?
03:40 – What position size do I need?
03:55 – Clients making excellent returns

Should you use a stop loss as a Forex trader? Let’s answer that question and more right now.

Hi Forex traders, it’s Andrew Mitchem here. Today’s Friday the 20th of November and I’ve received an email from Dan, I believe he’s in the US, and Dan said to me, Andrew, I’m not sure if you use stop losses. Can you tell me if you do use a stop loss in your own trading and if you do, how do you place that stop loss?

Always use a Stop Loss

The answer Dan is, absolutely yes, 100 percent I do use a stop loss and I always use a stop loss. Why? Well, because it’s an insurance protection against my trading account. What I don’t want to see is my trade go wrong and go drastically wrong and I lose a huge amount of money from my one trade. It’s just not a good way to trade.

So many people come to me and they say, look, I’ve just got stopped badly, if only I didn’t use a stop loss I would have then remained in trade and would have made some money. That’s possibly true in some cases, in many cases from time to time, but the problem is, is that it’s just the ones that you pick out. What you don’t see when you identify those ones that just get stopped down is the ones that may have hit your stop loss and then gone a lot further. For me, I always use a stop loss, have to use a stop loss. I think you then become a, almost like into a gambling situation if you don’t use one.

That’s just my personal opinion, but hey look, 11 years after I started trading, I’m still trading today and I’ve never come close to blowing an account by using that safe approach to my trading. I mean, you think of it this way, if you have an equal risk on every trade like I do, an equal risk regardless of the timeframe, of the chart, regardless of the length of time the trade’s in the market, regardless of the currency pair, regardless of whether it’s a reversal pattern, a continuation pattern, doesn’t matter what it is, every trade has the same risk.

Every trade should have the same risk

The only way that you can control that risk is to have a stop loss in place, because once you know where that stop loss needs to be, you can then calculate the lot size, the position size that you need to place on that particular trade so that if that trade goes wrong, you lose a set amount of money, a percentage of your account or a set amount of money, which ever way that you like to trade.

Where to place your Stop Loss?

In order to get that right, you need to know where to place your stop loss. For me, the stop loss needs to be placed at a level that says, this is a safety level for this particular trade.

If this level gets hit, wherever you decide to put it and I’ve got many ways of where I, you know, well not many ways, but I’ve got ways of where I know I’m placing my stop loss on every trade. You have to accept that if this level gets hit, then I’m accepting that the trade set up that I saw at the time is wrong. I get it wrong, it’s unlucky, the market goes against me, whatever the reason is, it gets stopped down so I have to say that if this level gets hit, and I’m buying up here, and if the price moves down and gets, hits this level and I’ve got stopped out, I accept that I’m incorrect on that trade.

It goes against me, I lose money, but I know a predefined amount of money or percentage of my account that I lose on that trade and I can live with that. I’m happy with that level. It’s a comfortable level, it doesn’t hurt me, it doesn’t mentally scar me, it doesn’t get in the way of ruining my trading account. That’s why personally I always go to no more than half of one percent.

What position size do I need?

Once I know my stop loss amount in pips, I can then work out the lot size needed. Absolutely, Dan, to answer your question, 100 percent yes, always, always, always, without fail, always use a stop loss.

Clients making excellent returns

Moving on to some other news that I’ve received this week, had a couple of emails just sent through just yesterday from clients. One Mike, and Mike also fromthe US, sent me a great example of a trade he made, 1.7 percent on a British pound, Japanese yen one hour chart. Great trading there Mike. Another trade from Chris over in Australia who made an amazing 4.2 to 1 reward to risk on a British pound, New Zealand dollar four hour chart trade, so risking half of one percent, Chris made an amazing 2.1 percent gain just from that one account, sorry, just from that one trade.

A four hour chart trade, put the trade on, he sent me a screen shot, it’s a beautiful set up. 2.1 percent of the account gained.

If you’d like to know how these guys are doing this and you’d like to have my help with allowing you to be able to trade successfully, just all you need to do is get on to one of my webinars, send me an email, get in contact with me, download that calculator on my website if you’d like to know about controlling risk. I’ve had a great week personally, myself. I’m up 4 percent for the week so far, which I’m more than happy with, still got one day to go, but it’s been a good week for a lot of traders. If you’d like to jump on board, let me know.

This is Andrew Mitchem, the Forex Trading Coach.