How to place a proper stop-loss? Here's all you need to know about it.
What is the purpose of stop-loss in forex?
A stop loss is an important tool for traders. It helps you avoid losing money when the market moves against your position. Stop losses are usually set at a specific distance from the entry point. For example, if you buy EUR/USD at 1.3100, then your stop loss will be placed at 1.2900. If the pair trades below 1.2900, you will lose all your investment.
Can stop-losses fail?
Stop losses are an important tool for traders. They allow you to limit your risk while still making money. However, there are times when a stop loss will trigger a trade even though the market did not move enough to meet the stop loss. This is called a failed stop loss. If you're using a broker that doesn't provide a free trial account, you'll need to pay to test out your strategy before trading real money.
Do professional traders do stop-losses?
Because they are using mental stops, professional traders don't need to give away where their stop loss is by placing them in the market. Instead, they place their stop loss at the point where they think the price will go if they were wrong about their trade.
How to place a proper stop-loss?
When you set your stop loss, you want to have a
“barrier” working in your favor to prevent the price
from moving against you. These “barriers” can be
things like support and resistance, swing highs and
lows, trend lines, etc.
This means that when you set a stop loss, you want
to lean against an area of value because the market
will face difficulty breaking through. Make sense?
Great. Here’s how to do it.
First, identify the area of value. Then add a “buffer”
to it so you don’t get stopped out just because the
price spiked through the lows of support.
For an example, let’s say your area of value is at
support, so what you’ll do is identify the lows of
support and subtract 1 ATR from the lows (for short
trades, you add 1 ATR to the highs of resistance).
Here’s what I mean:
Also, when you set a stop loss, it should be at a level
that invalidates your trading setup. For example,
if you’re buying the breakout of a bull flag, your
stop loss should be below the lows of the bull flag
because anywhere above it, the bull flag pattern
is still intact. But below its lows, the bull flag is
“destroyed,” and your trading setup is invalidated.
Summary
- Your stop loss should lean against an area of value which acts as a “barrier” to prevent the price from moving against you.
- The wider your stop loss, the smaller your position size will be (if you want to risk the same percentage of your account on each trade).
- If you want to capture a swing, then look to exit your trade before the opposing pressure steps in.
- If you want to ride a trend, you need to trail your stop loss as the price moves in your favor.