Why You Should Never Use a Fixed Stop Loss
In this weekly video:
00:26 – Where should I put my stop loss and profit target?
00:53 – Every trade is different
01.26 – Each currency pair has different characteristics
02:10 – What time frame chart, what time of the day?
02:44 – Put your stop loss and profit target according to the market conditions
03:40 – How I trade
05:17 – Teaching and helping traders for 9 years at www.TheForexTradingCoach.com
I'm going to explain why you should never use a fixed stop loss, or even a fixed profit target, on every single trade. Let's get into that and more right now.
Hi Forex traders, it's Andrew Mitchem here, The Forex Trading Coach. Video and podcast number 266.
Where should I put my stop loss and profit target?
Now a question that I get asked so many times, every single day; it's all about, “Hey Andrew, where should I put my stop loss? Where should I put my profit target? How many pips should I risk on each trade? I like to risk 15 pips and therefore how can I trade the daily charts?” All sorts of really interesting questions like that. Generally it comes back to people's misunderstanding of market conditions and how to trade properly.
Every trade is different
Because you see in my opinion, you should never, ever, ever think about using the same stop loss or the same profit target on all trades, because every trade is different. Every trade the market conditions change all the time. When people come to me and say, “Hey Andrew I want to risk 15 pips on a trade,” it's like well, why would you do that? What is the point? What's the relevance? What's the reason? Why not 17 pips or 12 pips? But either way, don't use a fixed stop loss because it's meaningless. Let me explain why.
Each currency pair has different characteristics
Each currency pair has different characteristics. For example, if you looked at the average range on the Euro/New Zealand or the Pound/New Zealand, let's say. Maybe several hundred pips per day it might move. But you then look at a pair like the Euro/Franc or the Euro/Pound, and it might move 50 pips in a day. But 50 pips on the Euro/Pound could be quite a big move. Whereas 150 pips on the Pound/New Zealand in a day could be quite a small move. It's a relative to the currency pair that you are trading.
But it's more than just that. Of course, you need to be aware that different currency pairs pair at different amounts per pip also.
What time frame chart, what time of the day?
Take that a step further; depends on what timeframe you're trading. It depends on the time of the day, possibly. Is it in the Asian session when generally not much happens? Is it in the European or US session? What month is it? What time of year and the conditions are right now? If it's Northern Hemisphere Summer season, the market might be a little bit flat. Now this week, heading into next week, we're coming up to the week before Easter. Conditions may be very, very flat, or they could be very, very volatile. We just don't know.
Put your stop loss and profit target according to the market conditions
The only real way you can do this is to put your stop loss and your profit target according to the market conditions right now. Because I can't say that I'm going to put a 25 pip stop on a Euro/US dollar one hour chart next week, because next week it could be really, really flat or it could be really volatile depending on all sorts of news events. As I said, leading up to Easter all sorts of things that right now I don't know what's going to happen.
But what I do know is that when I see a technical set up on a chart, if I put my stop loss at a set level it's irrelevant. If I put my stop loss at a level that's applicable for that trade on that timeframe on that currency pair with the market conditions as they are right at that time, I have myself a very safe stop loss. Same with a profit target; you have to use current market conditions at the time.
How I trade
To give you just a quick overview, the way I trade is I split my trading up into two slight variations when it comes to stop losses and profit targets. That's according to the timeframe of the chart. If I'm trading what I call the quicker timeframe charts, which personal I don't do a great deal of because I don't need to, but if I'm on a live webinar with clients then I will look at one hour charts or lower. If you like those shorter timeframes go for it. But if I was trading say a one hour chart or 30 minute or 15 minute, I'd look for my candle set up first. If I was taking a buy trade, I would look to put my stop loss below the set up candle low, unless there was a reason to go lower. That reason to go lower may be a round number nearby or a pivot point or a previous swing low, et cetera like that. But in general, it's at the low of the set up candle for a buy trade if I'm trading a shorter timeframe chart. Profit targets are all worked out again according to previous highs and round numbers, et cetera. I can help with more of that and teach more of that in my course.
Now, with the higher timeframe charts, four hours and higher which is what I generally prefer myself manually, I'm using fib levels; I'm using fib extensions and fib retracements. A really easy to use way in real time, not the traditional look for swing highs and lows and guess which is the high and low and draw fibs and all that's great in hindsight, but in real time that's very, very difficult to use. A little bit like elliott wave theory. But I have a very simplified way of using fib levels to help me with stop losses and profit targets that becomes relevant for the market at the time, what the market conditions are doing right now.
Teaching and helping traders for 9 years at www.TheForexTradingCoach.com
If you'd like more help with that, what I suggest you do is have a look at my website. You'd also find that I've been doing this teaching for nine years. You'll find on the Forex Peace Army website on the review website, I have nine years of client's reviews. Not too many other educational companies can say that.
Nine years is a long, long, long time. I've been trading the same way, the same strategy, and helping thousands and thousands of traders all throughout the world. If you'd like to join us, it's a great time to get on board. It would be great to help you trade successfully. Just understand market conditions and things like we've just been talking about, about how to best use stop losses and profit targets to give yourself a high probability chance of being a really successful Forex trader. Use our help to help you to take that next step and to get there.
Once again, this is Andrew Mitchem, The Forex Trading Coach. Have a great weekend, I'll see you this time next week.