Better yet, it is never logical nor strategic to move your stop loss to breakeven. Therefore I have decided to expand on that idea with some basic principles as well as an example from a recent trade I took. In this lesson, you will learn why it never makes sense to move your stop loss to breakeven.
Everywhere you turn in the Forex market there seems to be talk of moving stop losses to breakeven. The problem begins to surface when we look at why something is done. Why do most traders move to breakeven? Most who engage in the practice will argue that they do it to protect their capital, which by itself is a great reason to do anything as a trader.
There are many ways to protect your trading capital. For example, remaining patient and taking only the very best setups will help protect your capital. To prevent a loss, of course.
This fact alone proves that for most traders, the motive to protect the ego from a loss is greater than it is to protect their trading capital. A stop loss placed at your entry price does none of that. Price action trading works because market participants from around the world see the same formation in real-time. You are the only person on earth who knows where you entered a trade. So when you move your stop loss to breakeven you are modifying your parameters based on a level that is specific to you rather than one that is universally important.
Everything from your entry to your stop loss to your take profit level; it all needs to be strategic and never arbitrary. As you can see from the chart above, GBPUSD formed a bullish pin bar after a daily close above a key horizontal level. The chart above shows the long entry on a retest of the level as new support.
Note that the stop loss was placed under the low of the bullish pin bar while the target was set at recent highs. This gave us a setup worth a potential pips with a 90 pip risk 3. Now here comes the kicker. By the second day, the market had moved nearly 50 pips in our favor. However as I mentioned previously, a breakeven stop loss is more about protecting the ego from a loss than it is about strategically locking in profits.
Although the market moved even higher on the third day, those who had moved their stop loss to breakeven were stopped out just before the market took off to the upside. Does this look familiar? It was certainly a common occurrence for me when I started trading Forex back in Notice how in the chart above, the stop loss gets placed under the low of the second day.
Meanwhile, those trying to protect their ego from a loss came away with nothing. The idea of a breakeven stop loss is a flawed approach. All that matters from that point on is your target and an invalidation level, which is where the market needs to trade to invalidate the setup. This invalidation level is the only area you should be concerned with when managing your stop loss. A strategic approach such as this will ensure that you are trading the price action on your chart rather than listening to your ego, which will get you in trouble every time.
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