Where You Should Place Your Stop-Loss, and Why

In This Video:

00:20 A Question on Stop Losses
01:29 Connecting your Stop Loss to Market Conditions
02:48 Standardise your Approach, not your Stop Loss
04:52 The Markets this Week

I want to talk about where you should place your stop-loss, and why. So let’s talk about that and some more great trading information right now!

Hi Forex Traders, this is Andrew Mitchem here, the Forex Trading Coach and today is Friday, the 6th of March and I want to talk about where you should place your stop loss and why!

A Question on Stop Losses
The reason for that topic is that I’ve had an email here from Wackyl – I hope I pronounced that right – and the question is, “Would you please tell us about the placing of our stop-losses. I know that most people do it wrong. I’m not sure that the way I am doing it is right!”

So that’s the question that’s come through and really, when you think about stop loss, what is it? Well, we know it protects the trade but when you think about it, a stop loss should be placed at a level that means that if the trade that you take goes wrong, goes against you, then it’s no longer valid. So, what that means is that you need to look at your charts, in terms of placing your stop loss.

The problem is that most people just place a random, or not so much a random but a set level at random places. So, what I mean by that is people were to say, they’ve placed a stop-loss at 20-pips. Why 20-pips? Who knows! That’s what the Internet or someone tells them they need to place their stop loss at 20-pips or 50-pips or whatever it might be. It’s generally something ending in a zero and that’s the way that most people trade.

Connecting your Stop Loss to Market Conditions
Now, when you think about the logic behind that, what relevance does that have to the trade setup? What relevance does it have to the current price? What relevance does it have even to the time frame of the chart or even in the pair that you’re trading?

You see, if you’re trading on the Euro/New Zealand (EUR/NZD), for example, the movement in that is massive in comparison with a pair such as the Euro/British Pound (EUR/GBP). So, if you took a 20-pip stop loss on the Euro/Pound, that’s a reasonably big stop-loss for that particular pair because it doesn’t move much. However, if you put a stop loss at 20-pips on the Euro/New Zealand (EUR/NZD), that’s like the spread plus a small movement and it’s wiped you out of the trade.

So, you need to understand what time-frame chart you’re trading, what currency pair you’re trading; the reasons you’ve taken the trade; why did you take the trade? Look for things within placing your stop loss – things such as the price itself – what level is the price at? What’s the actual number of the price? When you’ve taken the trade, where do you want that stop loss to be? Not just 20-pips but I want to have it protected, let’s say if I’m buying a trade, I want it below the last swing-low or I want it below the pivot point or a previous support and resistance level or a round number or the candle-setup low – if you’re taking a buy trade.

Standardise your Approach, not your Stop Loss
So, think about your stop loss not in terms of “It’s always going to be 20-pips or it’s always going to be 50-pips”, but for this particular trade and this particular setup, on this pair and on this timeframe, it needs to be here! And, from there you then work out your position size!

So, once you understand the pair that you’re trading, the stop loss amount – you can then calculate your position size or your lot size – and I’ve got a great free tool available on my site, if you don’t know how to do that. And what that allows you to do is to control your risk. So, every trade has an equal risk on it – so, for me it’s never more than half of one percent – 0.5%. You’ve probably seen and heard me say that so many times but if I have a strict money-management rule in place, it means that I have very few emotions within my trading because I know that if I see a setup, I know its probability of success. I also know the return from each trade before I take it.

So, not only do you need to ensure that your stop loss is in the right place, you also need to ensure that there’s plenty of room for that trade to move to get to that profit target that you are looking for, before any previous price action or any reason for the trade not to get there. You know, you don’t want to be – a little bit hard to explain but – here’s the previous swing-high and you want place a profit target way up here, well past it!

Well, the likelihood is it could get to that last swing-high and it could then bounce back again, so why would you want to place your profit target well above a previous resistance level? So, think about your stop loss and your profit target in a similar way. Look at the price action, the numbers involved.

So, hope that helps you and hope that answers the question that was emailed in.

If you have any other questions that you’d like me to talk about, any topics – please do the same thing and just email me: [email protected] and I will answer those questions from now, and in future weeks.

The Markets this Week
So, further onto the markets right now and what’s happening – well, today being the first Friday of the month, we have the US non-farm payrolls, the non-farm employment change as it is now called, and that’s the first Friday of each month so that’s 8:30am on a Friday morning, New York time. It’s probably the one time of the month that I like to have almost all of my positions to close before then. Not so much if I am taking trades on monthly or weekly charts but almost everything else I have closed out.

And also, don’t forget that this Sunday, so this coming Sunday which will be the 8th, so, heading into the new week of Monday, the 9th, don’t forget that the US and the Canadian clocks change this weekend. So, for those of us outside of the US, 5pm New York time, when the charts open the first time of the week, that then becomes one hour earlier for everybody else outside of America and Canada.

So if you are following my free trading information, daily advice and analysis that I make, that’s available free on my website, just remember that that’s, now, going to be posted by five-thirty New York time, still! But if that’s been, let’s say, 11:30 for you, that now becomes 10:30 – one hour earlier! So bear that in mind when you’re trading from next week onwards.

So, this is Andrew Mitchem from the Forex Trading Coach, have a wonderful weekend and I will look forward to talking to you, this time, next week.