One of the best things I like about forex trading is that it allows us to set a stop loss for each and every trade we take to help us minimize our losses should the market price go against us.
In this article I focus on stop loss, where should you place it when you enter a trader, when you should move it to breakeven and also, when you should move it to lock in some profit
Even been in a trade where your stop was hit just right before the price turn and go in your anticipated direction? Well, I have, many times that I even lost the count.
I have been in a lot trades where price hit my stop loss then reversed and moved in my direction for hundreds of pips
As a matter of fact,let me show you what I am talking about. Seeing is believing,right?
The chart below shows a live example of a short trade on AUD/USD pair that I took on the 4th of April 2016.
This trade was based on trendline strategy. I placed a 40 pips stop loss in return for +700pips ( 1:17 risk:reward ratio)
Let’s see what happens next…
The price moved in my anticipated direction for +200 pips right after I took the trade.
So I decided to lock in at least 100 pips by moving my stop to 0.98842 . guess what happened next?…
The price reversed and hit my stop loss and I was out with only 100 pips (1:2,5 ration)
After my stop loss was hit, market price dropped +650 pips from my entry point.
Look at the chart below to see what I am talking about.
This is why it is very important to understand the behavior of the market as I have explained here on this post: how to read the forex trend
Make sure you read this post before you continue with this one.
understanding the market structure will make things much easier for you.
Back to this one…
Why did I move my stop loss too soon?
Well, why did I move my stop loss too soon? Was it because I didn’t understand the market’s behaviour? It must be that, right?
Wrong, not even close . i’ve known long time ago how the market move.
There are 3 seasons why I moved my stop loss too soon: discipline, fear and greedy.
You see, I wasn’t disciplined enough to use money management in the first place, so I got greedy and used a bigger lot size.
If you use bigger lot sizes, even a small move against you will cause you to lose a lot of money.
fear will also cause you to make careless mistakes – I’ve been in a lot of traders that went in my anticipated direct + 100 pips or more only to reverse later and hit my stop loss and leave me with a negative balance . So when this happen to you, you become more cautious and try to avoid it next time by moving your stop loss too soon.
So, how do we make sure we don’t get stopped out prematurely
When is the best time to move your stop loss? The only best way i know to avoid this problem from happening is to use peaks and troughs.
Let’s look at the downtrend movement
For a market in a down trend, use swing lows for protective stops.
Lets look at the AUD/CAD example one more time to see how i should have moved my stop loss.
In this example, even though my take profit target wasn’t hit, i would have still made a lot of money, at least 490 pips instead of 100 pips.
For a downtrend movement, the best way to place your stop is to wait for the market to form a peak, then use that peak to place your stop.
Ideally, as soon as you enter a sell position, place your stop loss 20-40pips above your entry level.
don’t move your stop loss until the market reverse and form a peaks then continue to move up. Continue to move your stop loss to recent peak untill your take profit target is hit.
Usually, when market price reserve and pass the previous peak, this could be an early warning that the trend is about to change.
For a market in an uptrend, wait for a pull back to form before you can move your stop loss.
Basically, as soon as you enter a buy position, don’t move your stop loss until the market reverse and form a trough then continue to move up. Continue to move your stop loss to recent peak untill your take profit target is hit.
Break out of a previous trough could be an early signal that the trend direction has changed.
See the chart below.
I hope you enjoyed this post.
Subscribe to my newsletters!
To receive free weekly trading signals, trading tips, & strategies subscriber via email
talk to me
I am always interested to read your comments- talk to me in the comments below. If you know any better way/s to place your stops, please share with us.
Also, don’t forget to share with your friends and family.