I know it’s best to have a higher reward than risk… as in risk:reward of 3:1 for example.
But most people and everywhere I read about where they place stop losses…
They place their SL’s in a place that gives them a 3:1 R:R ratio… or something along those lines.
When you do that you run the risk of getting whip sawed… resulting in a lower win ratio.
So since they only place the SL where they get a good R:R ratio… Why not place it even better like 1 pip SL… That could give them 10:1 ratio or even higher like 20:1 ratio… ofcourse you’ll get whipsawed even more then before but it’s same theory as 3:1.
I don’t like this style of setting SL.
I want to place the SL where it makes more sense… Where… If the price hits it… it’s because the uptrend has ended for example and it’s time to look for entry to go the other direction.
As an example if I spot reversal divergence… pullbacks ending below previous highs… breaking out below support… and any other signs of trend ending/ended.
How you prefer to place your stop is the “correct” way of placing stops. Using a set SL based on pips or dollar amount never made much sense to me either.
In my opinion the concept of risk:reward ratio is flawed also. Yes you would like a 3:1 ratio but what if the market is only giving you a 2:1 ratio on the trade, then what? Let the trade fall back into a loss? Ideally, you should let the market stop you out whether its by a reversal signal or some other signal that tells you this is as far as the market is moving in my direction. But I also understand the reason for predetermined SL and TP to take emotions out of the equation and not let greed or fear creep into your decisions to exit.
I think you should set your SL as you like (below support or a swing point etc) and also set a TP level (based on where the market has been before or Fib extensions etc)and only if the R:R ratio meets your requirements (3:1) then take the trade, as opposed to setting a SL and determining the TP level from that and vice versa.
Placing SL should be in a point where it will convince you that the price has reversed its direction (whatever timeframe you trade).
In the attached chart for EUR/AUD. The current price is 1.2794. If I go short at this price, I should be placing my SL above the price of yesterday around 1.2894, for a 100 pips loss. Then I look at the chart where the potential support is and I will make sure that if I win, the potential reward is more that 100 pips. In this chart I see a potential support at 1.2588, which is approximately 200 pips, for an Risk to Reward of 1:2.
There are many articles to use stop loss. I think no confusion should remain if traders properly get knowledge of it. Stop loss means it stops your open positions on a a pip where you set it. Stop loss does not means it stops your loss at all. It makes loss if it hit ,at the point which you use in trading.
