Minimize loses with the stop loss question

I have spent a week straight learning Forex strategies. There’s one thing I just don’t understand.

Why do I see many people say that the SL for a trade would be too big and best not to enter? Or better still why do people put the SL more than 5-10 pips away from the enter price at all?

I mean you can put your SL where you want right? Surely If you think the candle is shooting up, why would you not put your stop loss only about 10 pips below where you entered maximum. Why put the SL below the signal candle entirely thus making your SL perhaps 40+ pips and opening yourself to a big loss?

People are willing to lose 40+ pips because they put there SL there and no one said they had to right? could have put it 5-10 below the enter price and if the trade goes “against you” then -5 pips is better than -40…

I understand I havn’t just shown everyone to be stupid and that I myself am “missing something” so please explain the reasoning for this. Why put the SL below the signal candle…

thankyou

Trade an hourly candle and tell me how often the candle goes up an down 10 pips within that hour. Your also wrong on the face that risking 10 pips is better than risking 40pips. If I place a stop at 10 pips risking 1% of my account and my stop gets hit I just lost 1% of my account. Now if I place a 40 pip stop risking 1% of my account and my stop gets hit I just lost 1% of my account. So we just lost the exact same amount of money. Now you obviously have not been trading long so hopefully you have a demo account. On said demo account set a 10 pip stop on your entries for the next 100 trades. then set a 40 pip stop loss for the next 100 trades. I can bet you that the 10 pip stoploss gets hit at least 3 times more than the 40 pip SL does. Now you are right about the lower the pips are on the stop loss risking 1% of your account the more you will make if the trade goes right but also the more often your stop will be hit giving back the winning over long term. Also try not to set a stop at 10 pips because it is 10 pips and that nothing (after all it is still 1% of you account) instead set a stop loss where it makes sense on the chart instead of a set amount of pips and then set you position size to accommodate the size of the stop (risking1-2%). If you dont and you go all in then you wont be around here long the market will take you out the game quickly.

Thanks for the explanation. Yes i’ve not done much at all mainly just reading up to gain understanding. Two things you said I was not aware of.

  1. If I place a stop at 10 pips risking 1% of my account and my stop gets hit I just lost 1% of my account. Now if I place a 40 pip stop risking 1% of my account and my stop gets hit I just lost 1% of my account. So we just lost the exact same amount of money

I did not know this. I thought the further away the SL is the more money you gain to lose (1 pip = x) so how can 10 pips = 40 pips?

I need to understand how the “risk” factor works because clearly your saying the SL doesnt mean anything the further away you put it and the money you risked stays the same even if the SL was 100 pips away…

  1. the lower the pips are on the stop loss risking 1% of your account the more you will make if the trade goes right

Are you saying that the position of the SL effects the total gain in pips? how is this the case when the SL wont even get hit on a winning trade, therefore making the SL level meaningless?

I’d appreciate a link to a page explaining this in detail as all the reading i’ve done lead me to believe you can lose in the same way you win so I thought +pips = -pips. But your saying no matter where the stop loss takes you out the “risk amount” is all that was lost.

Thank you

Simple math, 100 pips with 1 lot in cash will be the same as 50 pips with 2 lots. Placing 10 pips sl is just not a good idea, commonly brokers use 2 pips of spread in eurusd, so when you pull yhe trigger you’ll see -2 pips and it leaves you only with 8 pips left. That is why the biv majority here recommends to user time frames bigger than an hour because it allows you to trade with sl of 20 pips or more, the spread is no so significant whe the higher the sl is.

Regards

For a better explanation I am sure clint or someone of the like will be along that are far better at putting that in better terms than me. I dont have a link I know due to the fact I trade and trade with real cash. Untill they get here I will do the best I can to explain this (wish me luck). Lets say you had a 100,000 USD account 1% of that is 1000 USD. With that in mind now you want to open a trade with EUR/USD. You open this with 1 lot (pip value is 10 USD) so you risk 1% that means you stoploss is at 100 pips (100 pip sl X 10 pip value = 1000 USD. Now lets say you want to take the same trade but up the pip value since you got confidence your stop will not be hit and want to make extra cash. So you now enter the trade with 2 lots witch now double the pip value (your pip value is now 20 USD) With this said to risk the same 1% (1000 USD) at 20 USD a pip you can now only have a 50 pip Stoploss (50 pip SL X 20 USD pip value = 1000USD). So now you return (if your stop dont get hit is now double with 2 lot instead of one). However please remember I ssaid in my last post to put a stop loss where it make sense then figure out your position size on how much you are willing to lose. Man I hopw you get this it is the most important part to trading successfully. If not stay tuned someone else will chime in with the same answer but in a better way to understand

Epidot welcome to babypips

If you haven’t done so already, I highly recommend the school of pipsology. it is a must read!

As for your stop loss question, it boils down to what type of strategy you are using. A scalping strat may use 10 pip stop loss while a swing trade may use 100 or 200 pip stop loss. The markets don’t move in straight lines.

Think of them as vibrating and they vibrate back and forth but eventually the vibration will favor one direction or another. your stop loss has to be big enough to allow this vibration to happen. On a 5 minute scale the vibration may be around 10 pips while on the 1 hour it may be more like 40 pips.

First thing to do is decide which type of trader you are. Than you have to decide what type of stop loss is required according to your strat. Than you take the stop loss and make it equal 2% of your account. (or whatever your risk is. My advice stick to 1 or 2%)

example. you have a $1000 account
your trading model says to risk 50 pips per trade
you only want to risk 2% of your account

here is what you do take $1000 and multiply by 2% or .02
you want to risk $20 (2% of your account)
so you take $20 and divide that by the number of pips in your stop loss. In this example 50 pips
pip value = 40 cents

This will work for any size stop. first figure out your risk amount. Account size times 2%
Than take that number and divide it by your stop loss amount

There you go. I hope I was helpful and not confusing.

Thanks for the explanations and they do make sense…kind of. I knew I wasn’t quite understanding it but now I do more so. However it brings about more questions.

I read a few times that the pip value is default to 1 cent, $1 and $10. Is this then not true if your manually calcalculating the value based on risk and margins?

Also when i’ve tried a demo trade, I choose the lot size and chose to buy or sell. Then I can either enter a SL or not at all. And i’m free to enter any number in the SL box. So i’m a bit confused how the SL seems to be in these calculations when your free to enter any value you like and even not at all if you so wish… i’m sure i’m just not quite grasping the concept yet…

thank you

Prices move in waves. Smaller TF waves, higher TF waves.

So your valid SL has to be on the Lower Low or Higher High of the current wave.

That is why they pick the bottom of the candle and areas like that, hoping that its the bottom of the wave.

You are missing leverage…

There are micro lots, mini lots and standard lots… they correspond to $1,000, $10,000 and $100,000. If you have a $1000 account, you can only afford a single micro lot at 1:1 leverage (or no leverage as it is otherwise known). So they will give you leverage, up to 100:1 or even more. Now your $1000 can buy 100 micro lots! Or a single standard lot worth $100,000. But that’s a lot of money to put on a trade on say AUD/USD when it’s at parity (1.00/1.00). In that case, the value of 1 pip = 0.0001 * $100,000 or $10.

If you only wanted to risk 2% of your account on a trade and you bought 100 micro lots using your 100:1 leverage, that means you would need to place your stop loss at 2 pips below your entry (-2 pips = $20 loss). But 2 pips is the spread you have to pay the broker. So you have instantly hit your stop loss. Lower your leverage to 10:1 (bad idea, because this continues to tie up your whole account on one trade, i.e. 100% [B]margin[/B], another concept you need to understand) OR only buy a 1 mini lot or 10 micro lots using $100 at 100:1, and your stop loss can now be 20 pips, as you are only holding a $10,000 position and 1 pip = $1 or -20 pips is now a $20 loss (your 2% risk). Your trade now has more room to breathe.

Let’s say on the time frame you are trading you’ll need to place a 50 pip stop loss to give your trade enough room to be right. 10 pip SL means an insignificant move against your position takes you out. What if you think it’s going up so you buy but the price goes down 15pips? You’re out of the game at -10, with a loss. It then immediately swings up 150 pips. You missed out on a very good trade. Your analysis was correct, but you wiped yourself out by having such a strict SL.

So a 50 pip stop loss means your position can only be $4000 in a currency. That is 4 micro lots, purchased with $40 of your $1000 account tied up as margin thanks to utilising 100:1 leverage. The value of 1 pip now = 40 cents. You can now make a trade with a very roomy 50 pip stop loss. If it hits your stop loss you are -50 pips which is 50 * 0.40 = $20 down. Excellent, that is your 2% risk level. Of course, with a 50 pip Stop Loss, you are likely aiming to gain at least 100 pips if you are right, or your risk to reward may be questionable.

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I read a few times that the pip value is default to 1 cent, $1 and $10. Is this then not true if your manually calcalculating the value based on risk and margins?

Also when i’ve tried a demo trade, I choose the lot size and chose to buy or sell. Then I can either enter a SL or not at all. And i’m free to enter any number in the SL box. So i’m a bit confused how the SL seems to be in these calculations when your free to enter any value you like and even not at all if you so wish… i’m sure i’m just not quite grasping the concept yet…

thank you

Read more: 301 Moved Permanently

One of the things new traders find difficult to grasp is the fact that trading is like a blank slate that you fill in. Another words you make your rules and you alone are responsible for your outcome. There is no nagging boss telling you to do it this way or that way. You don’t even have set paramaters unless you create them.

The stop loss is blank until you asign it a value. Most people agree a stop loss is necessary and it is by the stop loss that you define your risk for the trade.

If you don’t have a stop loss you are risking 100% of your account. It is up to you to decide how much to risk per trade. It is one very important aspect to your trading model.

Once you decide on an amount to risk you will have to decide what the pip value is. Some brokers have minimum sized but overall you can choose whatever pip value you need. its not just 1 cent or 1 dollar or 10 dollars its any combination of these.

For example you could have a $500 account, risk 2% which is $10 say your stop is 25 pips than your pip value would be roughly .28 cents

on a mini account where 1 lot equals $1 your lot size would look like .28 lots

Its a little confusing but you’ll get it. The most important thing is to realize is you define your risk before you enter a trade. That blank stop loss should be filled in, how you fill it in will depend on what your trading model is.

thank you johnny for your explanation, you really helped me to understand this clearly :wink:

thank you johnny for your explanation, you really helped me to understand this clearly

Read more: 301 Moved Permanently

glad I can help :slight_smile:

I’m trying to calculate a demo trade but i’m confused.

I opened a demo account for £3000 and I want to risk 2% so £60

The account is Micro so 1000 units and 1 pip = 10 cents

Leverage is 500:1 so I an hold $30,000

If I need a 40 pip SL what calculations do I need to make please?

Also I’m totally confused how on earth it even works when I chose to use £ funds and the pips and everything else is in $…

You should know your SL in advance to know your lot size

Okay

First you have to know the exchange rate for the pounds/dollars. Lets say this is 1.5

Your leverage is bad, choose 1:100. Leverage 1:500 will tighten your maximum stop loss (maximum stop loss is only 20 pips).

Your SL is 40(SL has to be measured according to your entry point i.e. the market will “tell” you where you want to put your SL). You risk 2% of your balance.

You take the exchange rate and multiply your risk amount in pounds= 60x1.5= $90

for 0.1 lot(mini,thats 10.000 unit) your stop loss can be 90 pips.(With leverage 1:100 you pay $100 or 100/1.5 in pounds. With leverage 1:500 you pay in $20 for that unit size. This is why it tighten your maximum SL.)

Your SL 40 pips then you can open a position with 90/40= 2,25/10=0,225 lot that equal to 2 mini lot(0.2)+2 micro lot(0.02) and 5 nano lot(0.005) if nano lots are available with your broker.

Hope this helps