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Last week I was reviewing a website which has a trading signal program for those investors who prefer to not being involved in confusing market analysis and I respect them because such services normally will bring them more time to do other important things in their daily life. But the interesting thing was the most of signalers did not actually place a stop loss point on their recommendations. Is that so because they know they are right all the time? Or that's because they did not lose half of their trading account in an unexpected slump of 200 hundred points and a single trade.
However, the answer is most of them have something between -1000 to -5000 pips of open trades on their signal board and they actually trapped in desperately while they could cut the losing trades and ran another one instead. Also I should mention that there are some other types of system trading that called "Hedge Fund" and I don't actually want to argue if they are right or wrong. I am definitely talking to day traders who get into challenge with big bear every day.
Sometimes, I don't understand why a trader could be convinced of not having a Stop Loss while we see almost every month an unexpected uncounted impulse (I would call it Best of the Test for whom with less of the rest) in the market.
There is no specific rule as to where you should place the stop loss, so consider the below mentioned tips as the general rules and ask your mentor to fit reliable Stop loss rules just for you and your trading system(If you have one?).
- Many loser traders do place the same stop loss for all the trades they execute without even trying to measure market environment.
- Don't be scared of placing a stop loss while it is for your gain and you must know what your profit objective is.
- Stop Loss should not be too close to the current price while most of the stop loss enemies have ruined their trading accounts already just by using very close ones.
- Stop Loss should not be too far from the point you get into trade while it's better to not placing any Stop Loss rather taking an unreachable, fictional protector.
- Try to not to risk more than the points of your profit goal. Pro traders recommend to only take those trades which have at least 2 points of potential profit per 1 pip of potential lose, but I would say it is completely depends on the money management system that you use, as different money management systems has different recommendations for Risk & Reward.
- Sometimes a trading system does not work if you risk less than recommended %7 to %10 of your total account balance. It means you trade oversize or you just entered the market when everyone else getting out of the market. In this case this is not your fault as it has a clear message for you "don't trade this way anymore and ask an expert to solve the problem".
- If you are convinced enough that you can make up 1 million dollar out of your 10000 dollars account by not using stop losses as you may think you are the one who knows the price will be back on its way to you instead of hitting new highs, well, simply you are wrong.
- Remember, there are no sky limits for the price of any of currencies in FOREX market.
- If you don't like to place a pre defined Stop Loss on your trades, please ask someone to show you how to follow a wining trade by using "Trailing Stop".
- Be sure it is better to have one or two losing trades with 100 points of lose, instead of being desperate with sinking into -1000 pips of dizziness.
How to Define the Best Stop Loss point?
Try these tools to define the most accurate stop loss points easily:
- Use 10 pips over/below the first Parabolic SAR spot(dot) appeared over/below the price candles for Short/Long Trades.
Note#1: Remember you just can use 10 pips above the parabolic SAR dots as an Stop Loss point when you have a Short trade and Vice Versa.
- Note#2: You realized that the Stop Loss obtained from SAR is too far from the point which you want to enter the market. OK, this means you are about to enter the market very late so better to not do it.
- Use 10 pips over/below the day before yesterday's HIGH and LOW and in the case of the market has moved a lot far, use 10 pips over/below the yesterday HIGH and LOW as a Stop Loss point for your Short/Long trades.
- Use two Moving Averages of 55 EMA and 144 MA. You may place your stop loss just 10 pips below/above one of those two MAs depending on how do you set up the profit/loss game for your Long/Short trades.
Note#: If you trade on the range market break out be aware of this kind of Stop Loss setting, and it is quite safer to use another way.
- Place the Stop Loss 10 pips over/below Bollinger Bands Upper/Lower band for Short/Long trades.
- If you use Elliot Waves theory to analyze the market:
# Place the Stop Loss just 10 pips below the lowest point of the Second (2) wave in bullish trend when you LONG on Wave 3.
# places the Stop Loss 10 pips below the lowest point of the 4th Wave when you go for LONG on 5th Wave.
# Place the Stop Loss right above/below the top/low of the previous wave when you go for SHORT/LONG based on A-B-C correctional waves.
Notes:
- Aforementioned suggestions are based on 4Hours chart.
- Those ways of defining Stop Loss points has worked for me, but It does not necessarily works for you, so ask your mentor or an expert friend to do evaluate the probability of fitting those suggestions to your trading strategy.
- 10 pips are because sometimes price hit the important support or resistance levels by more than a touch.
- Please don't forget, the Stop Loss issue is not actually a game. It is not even an option for you; it is a "MUST" and will save you when you can do nothing, so refresh your mind in this case.
About the Author
S.A Ghafari
IFTC Financial Studies |
