Tuesday, April 24, 2012

Where Should I Place My Stop Loss?

March 11, 2010 by  
Filed under Forex Strategies


I have received emails from some of my blog readers asking me this question and I think this is one of the important questions that have to be answered. Therefore I will like to answer it in the form of a blog post so that everyone of you reading this blog will benefit from it.

First of all, I am glad to receive this question from my readers as it shows me that you guys are using stop loss. There is nothing more dangerous than trading without a stop loss as a sudden big movement can totally wipe out your account.

The answer is pretty simple, if you are going LONG, your stop loss should always be 5 to 10 pips below the nearest support and if you are going SHORT, your stop loss should always be 5 to 10 pips above the closest resistance.

Let me go through some examples below:

1) Trend Line Break Trading – If you get a trend line break situation and you will like to enter a trade, you should then place your stop loss 5 to 10 pips above or below the trend line spot that the candle break out depending on whether you are going LONG or SHORT.

Trend Line Breakout

2) Triangle Breakout Trading – For this kind of breakout, it will work the same as the trend line breakout method. If you are going SHORT, you should place your stop loss 5 to 10 pips above the previous support of the triangle and vice versa.

Triangle Breakout

3) Support and Resistance Trading – Depending on how you want to trade the support and resistance, there are different ways you can place your stop loss.

Support & Resistance Breakout

If you are trading reversal using support and resistance, you will enter a SHORT trade when the price hits the resistance and in this case, you will have to place a stop loss above the resistance and if you are entering a LONG trade when the price hits the support, you will then place a stop loss below the support level.

If you are trading the break through of support and resistance, it will be slightly different. If you are entering a trade when the price break below a support and you need to understand that the support that is being breached has now became a new resistance and you will then place your stop loss above this new resistance.

However you should always calculate the amount of stop loss that you have to place for a trade and see if you are able to take it before entering a trade.

If your limit for a stop loss is 30 pips and you see a setup that requires 50 pips of stop loss, you should not enter your trade as it has exceeded your acceptable level. These are my 2 cents on this area and I hope that it is useful to you.

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Comments

5 Responses to “Where Should I Place My Stop Loss?”
  1. Prawin kumar says:

    Well explained article . In my opinion it is better to short just below resistance and long just above support iff we want to put minimum stop loss .

  2. Sunil says:

    Hi Guys,
    A wise suggestion..
    Please use stop loss as explained above or if you have better way. I have lost whole amount from my account as didn’t use stop loss and thought it will go up. Got distracted on phone and all lost.
    All the best
    Thanks
    Sunil

  3. tiger2010 says:

    kelvin, i do like this article. From my previous trading experience, i totally agree with your opinion in the stop loss.
    cheers!

    tiger

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