3 Rules For Using A Stop Loss

Stop loss has been a subject of debate since trading began. It is unclear why such an important
factor has a lack of rules attached to it considering all other trading factors such as entry/exit points
and various strategies come with strict rules traders need to follow in order to generate profits. It
almost seems like nobody wants to take responsibility of instructing traders where a stop loss should
be placed.

Risk Management

The reason why a stop loss is a subject taught in every credible Forex trading course is because it is
the only tool you have to control risk. That is, it is your only weapon that controls how much money
you are willing to lose. With so many various trading strategies and personalities out there, everyone
seems to use it differently. So, listed below are three major rules that create a better understanding
of how a stop loss should be used.

The Rules

1. Define your own stop loss – some traders place a stop loss 10% below the previous candle
whilst some place it a ‘few’ pips below a swing like they have been taught in their Forex
trading course. Where you place your stop loss will completely depend on your strategy and
your risk appetite. If you don’t know what that is yet you will always fear losing out too early
if you place the stop loss too near or losing a great deal if you place it too far. There is one
answer – data. Back-test your strategy for long enough to figure out how much the market
requires for a stop loss. Numerous historical set-ups will show you this. Always ensure that
you give the price enough room to move and place the stop loss just underneath/above that
price level. This is the price level at which the market says “you are wrong”.
2. Never move your stop loss unless absolutely necessary – your stop loss in one chart allows
you to shift focus on another chart. It is there to protect your investment so that you don’t
have to keep checking the same chart over and over again. Once it is placed, leave the stop
loss where it is even if the price starts moving towards it. Simply leave the market to do
what it has to. It may need to reach a price level a few pips near your stop loss in order to re-
set. Do not second guess it. If required, only move your stop loss to a break-even point when
in profit just before a major new event is due that could change everything.
3. Always trade with a stop loss – protect yourself. Do not think that you can beat the market.
Without a stop loss, you are literally in no-man’s land with no protection. At any point, a
major news announcement can be released that literally turns the market around against
you.

The above rules should be a good point of reference if traders are indecisive about where to put
their stop loss. They apply to every trading strategy and from this you should be able to customize
your own stop loss requirements.

Dragan Lukic is a Forex trading course
mentor at Forex Training Worldwide.

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  • OscarDo

    Ha, moving back the stoploss when it’s almost hit… almost got me broke so many times.

  • Bruno

    First time i traded i didn’t know what a stop loss was. I watched my money slowly go away. I learnt a valuable lesson, I wish i had read a bit more about trading before jumping in.

  • Alex

    Haha, so true.

  • He will believe you when he crashes his account.

  • Chris

    Great, now i can direct my friend to this article. He won’t believe me when I say that he
    needs to put on Stop Losses….

  • kelll

    Great article. “Real” traders definitly use stoplosses!

  • Blimey Lad

    Good article. Like Johno I wonder if the “real” traders really use stops. I guess the author of this article was from a large investment place, so if they teach it I assume they do?

  • Johno

    Do the “professionals” at the big tier banks and stuff use stop losses? I guess they have to as well cos they are using other peoples money? 

    I tried a robot out the other day through zulutrade and it kept putting trades on with out stop losses. scary stuff.

  • Richard B.

    Great article! I used to trade without a stop loss and it simply didn’t work. You need to give your price room to move but protect yourself – definitely.