Monday, September 04, 2006

How to stop loss

Using Stop Loss in anytime we enter the market is one way to manage our risk in trading. While some other traders might consider it as the sissy way, I don't….. I like to trade using Stop Loss. And it brings me to good results in the end of the day. Keeps me stick with well-controlled trading system.

When we decide to use stop loss, then we must be discipline in implementing it. If market price is heading so close to our stop loss, then we must not do anything. Do not ever try to replace your stop loss at further level from your open position level.

Replace your stop loss only for one reason:
For Trailing Stop Strategy (although I hardly ever use trailing stop strategy).

Now the problem is… where should we put our stop loss in each trading? Here are some tips I could give you:

1. Measure the gap between your stop loss and your open position level.
Usually I use these rules:

Eur/Usd: gap between stop loss and open position = 35 pips

Gbp/Usd: gap between stop loss and open position = 50 pips

These are representing maximum losses that you could handle in each trade. Keep that always in mind. We're not going to enter the market without this gap rule.

2. Entry strategy
Then you could predict your best entry level using your trading system. And when you decide to enter the market at certain level (using your trading strategy), do not forget to pay attention to your stop loss. Where will your stop loss be placed using the gap rule on tips #1.

Try to put your stop loss below Support Level (for Long position) or above Resistance Level (for short position).

For example:

We had Eur/Usd support and resistance levels are at:

R3 1.3052

R2 1.2962

R1 1.2906

Pivot 1.2816

S1 1.2760

S2 1.2670

S3 1.2614

Then after measuring the trend, you noticed that 1.2870 is the best place to short on eur/usd. That means, by using 35 gaps rule (see point#1), your Stop Loss would be at 1.2905.

Unfortunately, 1.2905 is not a good level to place your Stop Loss. Why? It is not protected by resistance level. When market moves upward, your Stop Loss is not well protected by its technical factor. So it would be quite easy for the market to hit your Stop Loss. Nearest resistance is 1.2906, above 1.2905. So what do we do here is to move our Stop Loss a little above 1.2905. Let's say we move it to 1.2910. Now technically, you have a well protected stop loss.

When you move Stop Loss, do not forget about the gap rule (as said in point#1). So we have to move also our open position plan.

And now, your plan becomes Short at 1.2875 (5 pips above 1.2870) and Stop Loss at 1.2910 (5 pips above 1.2905).

3. Keep calm when market heading so close to your stop loss.
Anything could happen in Forex in very short time. No one can control people madness when they enter the market. But the most important thing in dealing with this mad world is 'risk management'. Successful traders realize that sometimes they had to deal with fail trades.

So if your stop loss is hit, let it go. That's just the way it is.

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See also:
How To Use MACD
Easy-Forex? The best trading platform available today.
Forex Trading Explained
Institutional Forex System
The MasterTrader eBook
Forex Profits

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