Most traders [B]win more often than they lose[/B]…FACT
The chart below, taken from the DailyFX Traits Of Successful Traders, shows that over 50% of trades are wins…
…which begs the question, why do the vast majority of new traders lose on their trades?
this next chart, from the same source, shows the average difference in the size of losses incurred in pips.
Now we’re beginning to get the picture! If you look at EurUsd, the most commonly traded pair, you’ll see that [B]average loss value is almost double the average win [/B]value, and thats not even the worst performer!
This highlights why new traders need to Cut Losses, Let Profits Run, and one of the keys to this is knowing how and where to place your stops when you first enter the trade.
First, calculate the maximum amount of pips you would be prepared to lose before entering the trade. You can use the Babypips Pip Calculator for this to save you doing the maths. For example, say your trading 10,000 units of EurUsd. the calculator will show you that each pip movement has a value of $1. If you can only afford to risk $20, and your brokers spread is 1 pip, then you could place your stop at no more than 19 pips (20 minus 1 for the spread) from your entry point.
However, this doesn’t mean you should place it there. Consider the following;
- What is your Risk:Reward (R:R) level? If you’re looking to win 20 pips with a R:R of 1:2, your stop should be at around 10 pips.
- Where are the Support and Resistance (S&R) levels? As price frequently returns to these levels, its prudent to place your stop on the side of these that you dont expect price to reach - if you enter a buy trade at 1.1200 and Support is at 1.1185, its worth making sure your stop is below 1.1185, so long as you dont go outside your 19 pips acceptable risk.
These are stops which can follow your trade as it moves into profit. Say you set the Trailing Stop at 10 pips. As soon as your trade is 10 pips in profit, the Trailing Stop is activated, right on your breakeven point. This ensures that, even if price then reversed and fell, you would be stopped out without a loss. Its useful if you are away from your pc and want to protect your trade to a degree but I wouldnt recommend using it if you are able to watch live, for the reason that since price rarely moves in a straight line, a Trailing Stop is likely to stop you out of many trades before you can maximise your profit.