JasperForex

Stop Losses, Love Them Or Hate Them

FX:EURUSD   Euro Fx/U.S. Dollar
Stop losses aim to end a trade when the market goes so far in the opposite direction, that the trade idea no longer makes sense. It’s the point of invalidation. Ideally, they get hit on bad trades only and not on good trades. The area between entry point and stop loss is a zone where the trade is at a loss, but can still recover. This is not an invalidation of the trade. It’s a balancing act: place the stop orders far enough beyond your entry point to give the trade room to breathe and allow the price to rebound in the profitable direction, yet close enough to it to protect your account against a big loss in case of an invalid setup.

When you put on a trade, you take a risk. Acknowledging this means accepting this risk and quantifying it before you enter a trade. Not using a stop loss, to me signals not accepting the risk and thereby increasing it because if you don’t use a stop loss your account becomes one. I see not cutting losses early as a fear based trading error. I always try to trade another day and stops give me piece of mind. Automatic stops are even disconnection and hardware problem proof. Everything in trading is a trade off, so there are disadvantages: when it is hit and price reverses, or if its placed wrongly.

My philosophy when managing a trade is that either I am right, or I should be out. So what is the ideal place for stop losses? Trying to answer this is like searching for Columbus´ egg. And I haven’t found it yet. It’s a personal decision and I have no overarching rule. For each play in my playbook, I describe where to put the stop loss. I don’t use a fixed amount of pips; in stead I let the trade setup conditions dictate its position. With 5-point retracement structures like the Bat pattern this would be beyond the X-point (because if price moves across this level, then it was not a retracement structure and if I am not right, I should be out).

For 2618 plays this would be beyond the tops / bottoms, for channel trades beyond the trend lines and for other plays I use support and resistance levels. I always put the stop losses at a certain distance of these invalidation points, as price may pierce through them before reversing. How far they are placed from my entry point varies, depending on the timeframe and the size and configuration of the pattern I am trading. I always adjust my position size so that in each case the amount of pips from the entry point to the stop loss represents my maximum trade risk (as a fixed % of my trading capital).

As a consequence the position sizes I use vary from trade to trade but my risk does not. So, for any winning trade, how much profit I make per pip is proportional to the distance between entry point and stop loss. The placement of a stop loss also influences both the win rate and reward / risk ratio and therefore the expectancy. So its placement is absolutely key. When I am in a winning trade, I roll the stop loss in the profitable direction to lock in part of the profit, thus ensuring the winning trade does not turn into a loser. The stop loss has now become a profit protection point and the trade has become a management of profit. As a rule, I must have hit my first profit target, before I can do this manual trailing.

These risk free trades, essentially trading with the markets money, are awesome. Rolling the stops in the opposite direction is a no-go: stops can only be tightened, never widened. I can´t talk about stop losses without mentioning "stop loss hunting”. This refers to situations when the market quickly spikes and hits your stop loss so you are out with a loss, only to reverse and continue in the direction you predicted. I will not get into whether it’s the broker, the banks or institutional traders that are behind this (looking for liquidity to fill their positions), but this price behaviour does happen and taking it into account pays off.
You don´t need to be a weatherman to know which way the wind blows - B. Dylan
Very good topic. The placement of the stop loss is a very personal evaluation a person has to make. It literally depends on how much risk you are willing to accept for a certain profit. For me personally it's pretty much in line with what your method, position size is adapted according to the number of pips between the entry point and the point where for me the trade is no longer valid. My advise would be ... (but it's my personal opinion) ... NEVER move a stop loss further away from your trade entry, unless you are in profit and move it away from your entry point.

Too tight stops and trailing stops can make an otherwise winning stragey into a losing strategy, so you really need to make a good evaluation of where the stop loss nees to go. When entering a trade, that is the first thing I look at ... not the potential profit, but the potential loss.
+6 Reply
JasperForex MOD Nico.Muselle
2 years ago
Thank you for your thoughtful comment. You are right that the decision where to place your stops can make or break a strategy since it directly impacts win rate, reward / risk ratio and expectancy. So what do you use to determine where to place them: tops and bottoms / support and resistance / trend lines / ATR / Fibonacci levels / pivot points / supply and demand zones / candle wicks?
+1 Reply
Nico.Muselle MOD JasperForex
2 years ago
Personally I always look at previous structure and place my stop loss a number of pips above or below that respectively for a short or a long trade. The number of pips like you said depends on the timeframe and eventually the size of the harmonic pattern that I am trading.
If my SL after evaluation would end up being placed within 5 pips of a even handle number (with 0 for the units and 10s of pips), I will add and put it at least 5 pips over/under the even handle as these numbers tend to work like magnets to price action.
+2 Reply
JasperForex MOD Nico.Muselle
2 years ago
Excellent tip on the round numbers, they do become levels of psychological support or resistance and it makes sense to take this into account when placing stops.
+2 Reply
Caesare Nico.Muselle
2 years ago
how about using ATR*2 as stop loss?
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JasperForex MOD Caesare
2 years ago
Setting stops at multiples of the ATR reading at the time of initiating the trade is certainly a legitimate method. Twice the ATR would be conservative.
+1 Reply
Caesare JasperForex
2 years ago
By conservative do you mean narrow?
+1 Reply
JasperForex MOD Caesare
2 years ago
With conservative I mean using a larger stop. More aggressive traders could use a fraction (like half) of the ATR to set their stops. I call a larger stop conservative, because its more difficult to get hit and by scaling down the position size accordingly you give the trade more room to rebound (if it goes against you) while maintaining a fixed fractional trade risk.
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Nico.Muselle MOD Caesare
2 years ago
For bigger timeframes it is a good alternative to a fixed number of pips because it accounts for the volatility of the pair at that moment. But I always start counting from the structure in place, not from the entry of the trade
+1 Reply
Caesare Nico.Muselle
2 years ago
yes, I like to use this in the 4 hour timeframe. I trade on the 4 hours, but I find entry points using the 1 hour chart.
+1 Reply
cloudichimoku
2 years ago
great topic. Personally for me i enter a trade with a very tight stop and roll it to break once possible otherwise i will exit the trade. How i see it is if your stop gets hit at break even that means you can get a better entry so no reason to have a stop above break even once in profit on a trade.
+1 Reply
JasperForex MOD cloudichimoku
2 years ago
Interesting trade management method. So when your stop gets hit at break even, you see this as a sign that you can get back in at a better price?
+1 Reply
cloudichimoku JasperForex
2 years ago
yeah exactly
+1 Reply
RamdzanFX
2 years ago
i'm new in forex trading. just started with real account like 5 months ago after 1 year plus on demo...i believe in stop loss..every time i see a trade potential i'll check the risk reward ratio and only trade if the potential profit is the same with the potential loss.. it dealt me a great deal managing my capital. with at least 1 to 1 risk reward, u can trade 100 trades and lost 50% but your capital will not hurt as much.
+1 Reply
JasperForex MOD RamdzanFX
2 years ago
Very true, its primary goal is to protect your equity against an excessive loss in case a trade setup does not work. I personally look for reward risk ratios of 2.0 or higher. Thank you for responding to this trade idea and welcome to forex trading!
+1 Reply
tcas RamdzanFX
2 years ago
What about high volatility market when big stop and tight target can work very profitable?
+1 Reply
RamdzanFX tcas
2 years ago
if its suits your plan then trade it.. as i am new, i only place trade when i see the potential profit(s) is greater than the potential risk.. i cant afford to loose certain amount of money if the trade went the opposite way.. and it is difficult to get your emotion in checked as well..
+1 Reply
JasperForex MOD tcas
2 years ago
You might tune your stop to the market volatility, but would you use a reward / risk ratio < 1.0? My requirement for this stays the same and if I would not find a setup that matches it, I would not trade. Thanks for responding.
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tcas JasperForex
2 years ago
If I have a chance to win 80% reward/risk = 0.5 is not so bad. But it's not my method:)
+1 Reply
JasperForex MOD tcas
2 years ago
I agree that method would have a positive expectancy of 80% x (0.5 + 1) – 1 = 20%, so it would return 20 cents for each dollar risked. But I use a different method as well.
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Ahmer
2 years ago
JasperForex, I appreciate the act of commitment.

I personally use wide stop loss. You can assume it 1:1 risk reward ratio. I only use tight SL in a situation when i trade against the trend and try to scalp on retracements. I often cut the loss manually if i see the trade is struggling hard and there is an upcoming high impact news event that can possibly take the trade to a worst position. Generally I don't put a SL above a Pin Bar or previous double top / double bottom levels, Instead I put the SL much wider to double ZEROs round numbers or Fifty 50 levels. That becomes kinds 1:1 / 1:2 Risk reward ratio or some times even bad RR that might not be acceptable to many seasonal traders but thats what i have learn so far. Fibonacci Retracements are one of the tool that i use for placing my SL. Lets suppose if Price Action is taking place on a 50% retracement level then i put SL above 60% level incorporating Double Zeros, Fifty and Eighty Levels.

Further i believe we all are learning and everyone is quite different in terms of trading so it is better to communicate with each other find out new methods that can help us to improve our trading.

Thanks for the writeup JasperForex :)

+1 Reply
JasperForex MOD Ahmer
2 years ago
Well, I promised I would publish my view on stops so I did. Thanks for the kind words and for the elaborate response, sharing views and methods enriches the community and helps us all improve our trading; I have learned some things already from the responses so far! I like that you have a different method for with-the-trend trades and counter-trend scalps. The Fibonacci tool is also used by me for placing stops, but only if there is confluence or an intersection with an existing trend line or support / resistance.

When I am in an open trade and there is a high impact news event coming, I review how far its progressed in the profitable direction. If it has not progressed much, I close it just as you do. If I deem it progressed enough, I roll the stop to breakeven and enjoy a risk free news trade: nothing to lose and a lot to gain. It requires some experience to know when to do this and when not, as certain news events can be so volatile that price could gap over your stop and the slippage might leave you with a loss, but some of my most profitable trades have followed this path.
+1 Reply
tcas Ahmer
2 years ago
Ahmed, where would you place stoploss for week pinbar gbpusd? Just to understand better as you think.
+1 Reply
Ahmer tcas
2 years ago
Oh I see. Actually we are talking in terms of short term trading or Day trading. A weekly PIN Bar is something different. I do use Weekly Pivot Points for Entry/Exit trades and Place SL above/below that level only if Price Action Rejection Zones are align with fundamentals.
+1 Reply
allmywatchlist
2 years ago
The solution of when to sell is pretty simple but difficult to follow it if you are not strong enough, what you need to do is just follow your selling signal, most of people will sell their position before the selling signal comes out, according to my experience if you were able to follow your trading signal the final result will be much better than you take partial in those right trades.
+1 Reply
JasperForex MOD allmywatchlist
2 years ago
I agree perfect entries work better than early entries, but they are difficult to execute every single time. Practise is the mother of all skill.
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7878max PRO
2 years ago
STOP LOSSES should be included on every trade plan. Simple as a pimple
+1 Reply
JasperForex MOD 7878max
2 years ago
Thats how I see it as well. I define them for every play I have as a special section of my trading plan. You would be surprised however how many traders dont use them as a rule. Thanks for responding, I appreciate it.
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Useless topic. It's not stoploss that matters. It's your ability to accept the risk. Thousands of traders have stoplosses entering a trade. Half of them closes the position as soon as price goes several ticks agains them. The other half moves stoplosses hoping that price will change it's direction. What's the use in such stoplosses then?
To accept the risk you are to predefine it first. If you don't know how much money you are comfortable to loose, how can you accept it?
+1 Reply
JasperForex MOD Alexander_Nikitin
2 years ago
Thanks for your response, although I wonder if you actually read and understood the topic? I state specifically in the 2nd paragraph that we need to quantify and accept our risk before entering a trade. I don’t propagate closing a trade before the stop is hit and state in the 6th paragraph that stops should only be tightened, never widened. If more traders would follow these or similar rules, than less of them would behave the way you just described. Seems pretty useful to me.
+2 Reply
Well said. I always trade with a stop, if I don't I can't manage my % risk. Mental stops are useless as we always live in hope of the trade reversing.
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JasperForex MOD FollowMyTrades
2 years ago
Thanks for leaving a comment, I appreciate it.
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finitemonk PRO FollowMyTrades
2 years ago
Yes, mental stops can be surprisingly flexible, especially if the trade is now in a loss of "more than you'ld hoped".
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JasperForex MOD finitemonk
2 years ago
Been there, done that... when I just started trading. Hard, automatic stops are more reliable. Thanks for the comment.
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TheBulltrader
2 years ago
For me, I've found that not using a stop loss has never hurt or damaged my account. I'd even say that it has helped my account. I do trade very small risk so I don't let a randomn 500 pip move wipe me out. It would take a randomn 5000 pip move to do that so I'm not worried. I also only trade eurusd and gbpusd so no surprises. I use stops only on high leverage trades and that's about it.
+1 Reply
JasperForex MOD TheBulltrader
2 years ago
Thanks for responding, I appreciate it. When you dont use a stop, do you mark a ´point of invalidation´ on the chart where the trade idea would stop making sense? And if price hits this point, do you then take it off manually (mental stop) or open a trade in the opposite direction (hedging)? I am curious how you handle a trade that goes against you.
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TheBulltrader JasperForex
2 years ago
I trade with the trend and will except my loss when heiken ashi monthly changes from red to green on eurusd. But now I'm testing out my new indicator that's tells me when to enter and when to exit. So still don't need a stoploss unless I leverage a large position.
+1 Reply
JasperForex MOD TheBulltrader
2 years ago
Understood, thanks.
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TomPip
2 years ago
People hate stop losses, because occasionally they pick them too tight and think they were right all along if price reverses just after their SL. "Next time, i'll just move the SL or just remove it briefly". At least, that's how my mind went. Pick a SL and stick with it. Calculated loss, keeping losses manageable and known before going into a trade, is how i manage to make a profit.
+1 Reply
JasperForex MOD TomPip
2 years ago
Thanks for sharing your view on this, I agree once a stop is placed, stick with it. I do however periodically review if I place them optimally and tweak my rules from time to time. Be strict on the execution of your stop placement rules, but be open minded when it comes to reviewing the rules themselves.
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TomPip JasperForex
2 years ago
Being flexible is indeed also required, but in general i'de say that if you want to lower your initial SL, is it because new information is available that allows increasing risk or i misjudged the situation. The latter should have alarm bells ringing. And sometimes it's hard to not have clouded judgement. But sure, ITM i'm a lot more flexible with trailing the SL. :)
+1 Reply
JasperForex MOD TomPip
2 years ago
When you trail the stop loss, the trade has become a management of profit. Trades that allow you to do that are great :-)
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mxer474
2 years ago
In these situations would u recomend hedging?
+1 Reply
JasperForex MOD mxer474
2 years ago
I am no expert on hedging, since I never hedge, maybe someone who does can answer this question...
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Ahmer mxer474
2 years ago
Most of the retail traders are short term traders so Hedging can only be done by someone who understand the long term market direction.
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jack1h PRO
2 years ago
Stop Losses are part off a professional Trading Plan or the greatest part of Money management....before any trade one must know how much one will lose ... for me its' the first order I figure out.
+1 Reply
JasperForex MOD jack1h
2 years ago
Makes sense to me. Thank you for sharing your view on this.
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AndrasCsufor
2 years ago
Amen
+1 Reply
JasperForex MOD AndrasCsufor
2 years ago
I hear you :-)
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Troy123c
2 years ago
I usually use moving averages as a guide for where to place a stop. Usually, a calculated distance above or below that MA depending on the direction of my trade.
+2 Reply
JasperForex MOD Troy123c
2 years ago
Interesting method. Thanks for sharing your view on this.
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gday9999
2 years ago
Very, I mean very, well written
+1 Reply
JasperForex MOD gday9999
2 years ago
Thank you for saying so!
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BabushkaTrader
2 years ago
I believe that in the long term a trader has a 50% chance so the only thing that matters is your risk reward i.e. stop and profit target. Rest is fooled by randomness.
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wlrfxtrader PRO BabushkaTrader
2 years ago
50% would be amazing! I think any given trader has about 10% chance of success- and stops are KEY. Happy trading.
+1 Reply
JasperForex MOD BabushkaTrader
2 years ago
If you mean to say that basically every trade is like a coin flip, than I would add that certain trading methods can weigh the coin to get the odds in your favour. If you then add to that good money management and trading psychology you have a real chance at succeeding in this business.
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BabushkaTrader JasperForex
2 years ago
I think that success for a trader is less than 5% percent the first time he tries just like any entrepreneur trying to start a business most people blow up. But I think the odds for success are much higher the second time a trader tries but most people give up and most people are not successful or in the top 5% of anything they do in life. That is life. Speculation is life. Finally, to be a super successful trader i.e. Ed Seykota and the legends then it requires even more so maybe 1% are there just like with the Aaaples and Googles. However, making an ok living is definately possible. I am not a fan of trading by the side of your job etc just like I am not fan of someone starting a business at the side. One can do it for a while but eventually it is like having a job but being at another job. A lot of personal things will affect your trading just like starting a business so it is really not the strategy per se that always screw people up.

Further I think that any trading strategy if not adapted has a win ratio of 50% over the very very long term - however few traders stick to the same strategy over the life time of their trading sccessful or not as peoples psychology evolve but I think that it is very dangerous to believe that one will get and edge over the very long term that is more than 50% successful - often it is lower - but that does not matter even though it FEEEEELS good to be right. Trading is not about being right in my opinion (even though most of the financial industry is based on this show) but on having the right risk/reward. In my humble opinion finding strategies that have good risk reward is key while probability of success is just secondary and impossible to define, measure or find. Yes as traders we run around looking for and edge etc but I think in a sense we are wasting time as regards to the profitability. I trade mostly with only horizontal lines and it has been the best strategy of the 100s of stuff I tested, traded and backtested.

Psycholgy is important but sometimes it is just something "trading coaches" use to keep their losing students i.e. make them feel better about themselves etc. I have been through that route and what is really important in terms of psychology is no magic. It is to stick to your business model i.e. a trader is like someone starting Apple so he should not try to start Berkshire at the same time i.e. just stick to one setup, strategy etc. The slimmer the better. As to position sizing yes this is very important but again it is all about what heat you can take as an individual. I do not belive there is a right or wrong. I have tried most such things i.e. optimum f, smoot-ratio etc etc but in the end you are risking a percentage of your account and you need the guts, the luck and stamina to get performance.
+2 Reply
JasperForex MOD BabushkaTrader
2 years ago
Wow that was almost an entire publication, what a response, thanks! I agree focussing on win rate alone is not good, you need good risk reward set ups (read: the average winner must be bigger than the average loser) and the discipline to stick to your method.
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This is such an important issue that seems be over looked so often, especially by new traders. We are drawn to trading for the limitless gain and the truly free environment, but to be successful we have to make rules for ourselves! It seems counter intuitive (at first). And not only do stops provide the vehicle to "fight another day", but it also helps us determine position size, time in trade, and gauge the worth of a trade- they are as important, or more important, than your strategy in my option. Great write up... Trading View needs stickies because this would be up there! Thanks, and happy trading.
+2 Reply
JasperForex MOD wlrfxtrader
2 years ago
Very good point. In trading, the possibilities for how you go about doing it are limitless. You can see it in the many different methods and rules we all use. No 2 traders are the same, even if they follow the same strategy (like pitchforks, or harmonic trading) you will find their actual rules can be and usually are different. The same holds for how we use stops. Thanks for the kind words and your elaborate response.
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BabushkaTrader JasperForex
2 years ago
Good write up. I think all successful traders are the same i.e. risk reward is correct and they are able to suffer and come back. Being able to suffer is what makes or breaks a trader. The rest is teachable.
+2 Reply
JasperForex MOD BabushkaTrader
2 years ago
I have read that successful traders have similar characteristics as successful athletes in that they are elite performers who keep perfecting their skills and can overcome adversity through perseverance.
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IMO the professionals can see where the stops are (either through a paid service or order types being sent) and depending on the market, the larger institutions will hunt collections of stops for adding money to the bottom line.
+1 Reply
JasperForex MOD MarketAlly
2 years ago
I think you are right about this and its something to take into account when using stops.
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Personally, I cannot operate without a stop loss. The basis of money and risk management for me is predicated on knowing at least the stop. Mental stops have never worked for me because there's always a "it's going to turn around moment" that I hear in my head that makes matters worse most of the time.

Also, for me, determining the "stop loss" also gives me a clearer vision at the "take profit" target and if it's even reasonable. No point in having a 100pip SL and the market has heavy support/resistance 50pips in the direction you are trading.

Risk/reward ratios are utterly important, at least for my trading system as it allows me to be wrong more but still profit.
+1 Reply
JasperForex MOD ReyHaynes
a year ago
Well said! Thanks for sharing your view on this.
Reply
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