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Learn to use Stop Loss effectivelyStill unsure whether you need it?
And yet another hundreds of traders, having heard dozens of times about importance of protective stops, open new trades ignoring recommended money management rules. Stop loss is not a favorite tool for many traders as it requires taking necessary losses, calculate risks and foresee price turns. However, such money management tool in hands of a knowledgeable trader becomes rather a powerful trading weapon than a tool of disappointment and painful losses. Every trader is free to develop or choose his / her own trading style and implement money management rules. We will go over several methods of using a stop loss tool. 1. Simple equity StopIt's an important money management rule: not to risk more than 2-3% of the total account per one trade. According to this rule, a trader would place an order and based on a lot size would calculate amount of pips required to reach the limit of 2-3% of the total account balance (and a stop loss will be placed at that point).For example: a trader has 1000 USD on account, he places a buy order of 4000 units on EUR/USD, which will give him 0.40 cents per 1 pip. Since 2% (out of 1000 USD) that he is willing to risk equals 20 USD, calculations will be next: 20 / 0.40 = 50 pips is the limit for this size of trade. Learn more about risks and effective money management on our main page: 2. Chart based StopAdopted by many traders, this stop relies on different chart patterns, indicators and signals received when using technical analysis of price moves at any given time. There are many styles, rules, techniques on how to and when to use a stop loss, associated with different technical indicators and different trading systems. Examples of some of them can be found at TrendLineBook.com and FibonacciBook.com.There are many approaches to placing protective stops: stops based on swings high / low, stops using trend lines, fibonacci related stops, etc. Let's take a look at some examples below: Stop based on last swing low (double-bottom pattern)
Chart based stops are widely used in combination with simple equity stops.
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