Help With Stop Loss Logic Please

Beginner Questions
1

Hi Folks,

Having a bit of a dilemma with how stop loss is implemented properly so hopefully some of you can help clear this up a bit for me.

Below I have included a screen shot with a long position I would have entered setting my take to profit around 12-14 pips with a stop loss of 6-7 pips. My confusion is if I do my best to stick with a good risk reward ratio of around 2:1 then looking at the below chart that I have marked out with the previous low which buyers pushed back up and it finished as quite a strong bullish candle, setting my stop loss from the buy to that previous low would be around a 30-32 pip stop loss if I’m reading it correctly?

From what I understand a lot of traders aim to set a stop loss at the previous low do they not? as part of logical thinking that the market has the potential to dip that far again and so they set the stop loss there but another upside is that it allows the trade to breathe more as well?

Just trying to work out what the best thing to do is as I’m trying to work on a 2:1 system which is difficult due to the below example. A 6-7 pip stop loss doesn’t seem that much at all in certain situations, a more logical approach of viewing current price action may dictate setting your stop loss at a previous low which could be 20-30 pips which would make for the most sound decision because you know it has the potential to dip but you’re expecting it to spike to hit your target. Another thing here is that you also want to give the trade some room and not smother it with too a short stop loss.

This then blows risk reward out the window and brings the question to mind, what is the best thing to do?

Edit - mean’t to add in that I’m trying to trade on the 1 hour time frame

Thanks,
Steve

Trade1.jpg700×369 31.9 KB

2

Dont fit the trade around what risk to reward ratio you want. Yes your stop ‘should’ be at the absolute low in most cases. Adjusting a SL to make a minimum RR is not going to work.

3

Thanks for the reply Jezz.

I was thinking that sticking to a 2:1 ratio all the time wasn’t very logical and I can definitely see that in some cases when you need to compensate for potential swings your stop loss should be adjusted based on that, even if it means moving to 15-20 pip stop loss?

4

I agree … specifically, you shouldn’t want to plan your whole trade around that. It would be terribly restricting?

You say “even if” as if this is something awkward or inconvenient or unexpected? But you’re trading from an one-hour chart, here? 15-20 pips isn’t a wide stop-loss for trades taken on a one-hour chart, surely? I can’t remember the last time I traded from H1 charts, myself, but I’m sure my stop-losses were [I]at least[/I] that size …

5

Yeh I was just confirming this is the case as I’m fairly new to the world of forex.

If I’m trading on the 1hr charts I did think that 15-20 pip SL sounds about nice in terms of allowing the trade to breathe. For this kind of stop loss would I not need a fairly good sized bank roll? I would do my best to limit risk of course but that would all depend on how volatile the market is at the time.

Would you mind throwing out some numbers for me? i.e. if you start with this much then you trade this lot size and this is roughly your SL level.

Some examples from someone who’s been there done that and knows the ropes would be helpful.

Thanks again for the reply.

6

if you know your odds you dont want , like to day trade forex , whats your position sizeand leverage in use ?, do you only trade euro usd ?
i recommend you read this guy blog might you like it too
Pipsychology - Forex Blog: Psychology of Forex Currency Trading

7

The size of bankroll you need for any given stop-loss is always going to depend on your position-size. Or more accurately, one should say that your position-size is always going to depend on your bankroll and the size of the stop-loss.

If you’re opening a trade with a 20-pip stop-loss, for example, and want your position-size to be 1% of your account balance (and personally I’d advise you not to go above that, at least for your first year of live trading, though I know everyone thinks I’m “very conservative”), then that would mean - for EUR/USD which always moves at $10 per pip per full lot - with an account of $1,000 you’d want 20-pips to represent $10 (1% of your account) which would be $0.50 per pip and that’s half a minilot (= [U]5 microlots[/U]).

So your “rule of thumb” in those cases would be $200 in your account for every [U]1 microlot[/U] of position-size you open, on EUR/USD.

That’s how to work it out, anyway (on the basis of a 20-pip stop-loss).

Yes, absolutely right: it always depends on volatility.

I think you’re right to put your stop-loss “under the swing-low” and of course that is relating it to the volatility.

Another way of relating it to the volatility is to use a multiple/factor of the ATR at the time you open the trade, instead. My own opinion is that that’s still much better than having a fixed number in mind, but probably not as good, overall, as positioning the stop-loss under the recent low.

It’s not easy without knowing exactly what someone’s doing. My own instinctive feeling was that at 15-20 pips your SL might be a bit on the small side for trades from a one-hour chart - I was thinking more like 20-25 pips on average. But I’m only guessing and we’re not a million miles apart, anyway. (I’m assuming/guessing you’re expecting these trades probably to be open for “a few hours or so”?).

Also guessing and doubtless approximate/ball-park figures, but if you look at the example above, we’re talking about a 5 microlot position-size for a $1,000 account and a 20-pip SL on EUR/USD, and I think you can see how I’ve worked that out? I hope that’s more helpful than confusing, anyway … :8:

8

Again, thanks for replying it has helped me understand things at a more basic level.

I know this question must get asked all the time but I’m curious to know how viable it really is. How difficult would it be to trade for a living? and I don’t mean trading to hit the millions (although that would be great lol), I mean trading to make a decent yearly sum of around 30-40k.

I do know there will be a good percentage or traders who make a ton of money and then you have the bracket below where traders trade for a living because they enjoy it and are happy to hit that range of 40-100k per year.

9

you can avoid beeing stopped out too ealry by splitting your entry into 3 pieces so to say.

33% first comitment and therefore a higher stop loss (equals less risk of losing and less risk of beeing stopped out), after a advance in your direction you open another 33% commitment.

10

Ironically, perhaps, the longer I trade for a living, the [I]less[/I] able I feel to answer this question. :8:

I know you’re asking because understandably enough you want to assess how easy/difficult it would be for [I]you[/I] to trade for a living, and the only honest answer, useless though it is, is “I don’t know”.

It’s not [I]easy[/I] for anyone, but it’s more difficult for some than for others.

In my opinion, the people who do well at trading are those who don’t rush it; who understand that it’s a process rather than an outcome; who understand that there’s a long learning-curve before demo trading and plenty of demo screen-time needed before trading with real funds; who take fairly naturally to understanding the requisite probability and statistics; who don’t treat it as gambling; who don’t accept widespread consensuses of opinion as necessarily being right; and things like this.

If it helps at all (which it won’t, necessarily, because we’re two different people), this is how I learned.

I can imagine.

I don’t want it to sound off-putting, when you’re looking for enthusiasm and support, but I don’t know if I’d ever have managed it at all, under those circumstances.

Yes, I used to think of “about 3k per month” as being “enough at least to satisfy me that I’d be able to do it for a full-time living”, and it took me years to get it to that level.

I don’t think so.

Plenty of people, yes; but not “a good percentage”: I think it’s a very, very low [U]percentage[/U]. I think the proportion of people who take up trading and [U]ever[/U] manage to achieve a [I]steady monthly return[/I] from it at all is [U]well[/U] under 1% and maybe even under 0.1% (I can’t prove it, of course), and most never become profitable at all.

Sorry - probably [I]not[/I] what you wanted to hear, at all. :8:

11

I have a plan which is packed with insane determination and unbreakable will power, with that being said I’m confident I can cross that long learning curve to achieve my goals.

12

This makes sense. :cool:

I don’t think anything you’ve said sounds “bad” or “wrong” … but I don’t understand why you’re approaching this in terms of R:R at all, or why you want to aim and work towards specifically a 2:1 reward-to-risk ratio. I’m hoping that that wish won’t result in your ignoring any other opportunities that might present themselves.

I know that trading forums in general (and this one in particular) are full of people advising aspiring traders not to use trading methods with reward-to-risk ratios of less than 2:1, and I think they’re all offering [I][U]really[/U][/I] bad advice which can damage people’s prospects.

I’m not suggesting that there’s anything intrinsically wrong with a reward-to-risk ratio of 2:1 … but there’s also nothing wrong with a reward-to-risk ratio of 1:1 (and it will have a [I][U]far[/U][/I] smoother equity curve and easier position-sizing, as well, and be much easier to handle).

That part certainly sounds good (as long as it’s a plan with a genuine, proven edge, of course!) … :wink:

13

Well part of that plan is learning from all trades that fail (hopefully not many down the line!), find out why they failed and make sure I do my best to prevent that from happening again ( although preventing all is impossible but you can certainly try your best :slight_smile: ).

14

I’m also always curious about this kind of thing, but simply don’t know. (If I had to guess, I’d guess that collectively they tend to overextend their risk by trading multiple pairs simultaneously, perhaps in some cases not quite appreciating the risk of the close correlations of so many currency-pairs, but I’m a notorious skepchick, so that may not signify anything much at all, and may not even be right. )

I agree. I think it can particularly “turn against you” not so much in terms of the longest [I]consecutive[/I] losing run you might encounter, but more importantly (and more commonly) in terms of the “longest losing patch”, which tends to be longer and trickier than most people expect. It’s [B][U]far[/U][/B] easier than is widely imagined, with a 2:1 R:R, to reach with “level staking” a point at which you lose 20-25% of your account without having done anything wrong or failed to stick to your system at all.

Indeed … but this isn’t easy, and can require a very large sample-size to analyse (and trading from daily charts, rather than from shorter/faster ones, necessarily reduces the sample-size, too). Sometimes one encounters quite a few consecutive losers while having done absolutely nothing wrong at all, simply because all systems/methods necessarily include some inaccurate signals.

15

Hi Steve, you can try using a Trailing Stop Loss (TSL) placed outside the swing. You then have set breathing room if the entry moves against you or an improvement in the RR as the trade moves for you.

I have been caught by a sudden surge in price in the profit direction which moves the TSL in closer only to be stopped out when the next surge goes against the trade…mmmm… take a look at the option though.

16

Hello, I set my stop loss trading position in order to market condition, like when I use scalping trading then I don’t like to use big SL position! But if there is no reliable place for short stop loss position then, I might be avoiding this trade! Because, I am very sincere on risk reward ratio, even I am not interested on 1:1 ratio!