How to Set your Stop Loss?
Setting a stop loss can be tricky. Without it, you are doomed to fail but at the same time, if it gets triggered too many times, you are also likely to fail.. So you may be asking, where should my stop loss be then? There a lot of variables to take into account when applying a stop loss.
The first of which is, ‘where is your profit target?’ For instance, EUR/USD is trading 1.3050, you speculate that the pair is going to hit 1.3100, a gain of 50 pips, if your risk/reward is 2:1 then your stop loss should be 25 pips below where you placed the trade, so in this case the stop would be at 1.3025. Different systems have different risk/reward strategies so be sure to follow yours accurately
HIGHS and LOWS
This is the one indicator that stands out above all and is in fact the mother of all indicators! No matter what type of trader you are, however big or small, highs and lows are of paramount importance when it comes to setting your stop loss. Ideally, you should always place a stop loss in an area where the market should not go if your initial prediction is right. For instance, if you are day trading and you are long a certain asset, that means your stop loss should be somewhere below the daily low or the previous day’s low, reason being if it is too close to the market, you risk getting stopped out even if your prediction end up being right. This is called ‘avoiding the noise’
DAILY STOP LOSS
Although each individual trade should have its own stop loss, due to the nature of trading volatile markets, you should always assign yourself a daily stop loss. Meaning that no matter what happens on any given day, there should be an amount that you should never lose beyond on any given day. The idea is to stay in the game long enough to improve and grow, without getting wiped out in one session. Investors have different opinions on what this amount should be, depending on the individual trader, their strategies and the size of their account, it is typically set to 5 – 15% on any given day
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