He has a monthly readership of , traders and has taught over 20, students. Stop loss placement is perhaps not the most glamorous of trading topics to discuss, but it is a critically important one. If you do not know how to properly place your stop losses you will be in for a very, very rough ride as you trade the markets. Essentially, for a trader, everything hinges on proper stop loss placement and risk management. If you understand these two aspects of trading and how to approach them properly, making consistent money in the market will become much, much easier for you.
The first thing to understand and drill into your head about stop loss placement is that you should NEVER place a stop loss based on some random amount of pips. A stop loss should typically be based on a level in the market. You want to see price invalidate your view by giving you fact-based evidence you are wrong, that evidence comes in the form of the most logical nearby level of support or resistance being breached.
The first example below shows a random pip amount stop loss placement, the second example shows a stop loss placed within the context of the market and nearby levels.
Make note of the end results of both trades…. Notice in the chart below the trader placed his stop loss at an arbitrary 50 pip distance from entry.
Notice this trader would have been stopped out for a loss just before the market shot higher, without them on board…. Notice the stop loss was placed beyond the key support level and beyond the pin bar low, giving the trade good space to work out but also being placed at a point that would logically invalidate the trade if price moved beyond it….
In other words, I always start any trade by seeing if a 2 to 1 or more risk reward is realistically possible given the market structure and context the pattern formed within. For expanded examples, check out my lesson on how to place stops and targets like a pro. You want your stop at least half of ATR average true range if not more or you will get stopped out due to noise. It is a good tool to utilize for stop loss placement when no nearby key levels are present.
To learn how to apply and use the ATR tool more in-depth, check out my article on the average true range.
The example below shows how to use the ATR for stop loss placement and how it can keep you in a trade despite initial choppy conditions after the pattern…. You base the potential target of a trade on the stop loss distance. Risk reward and position sizing are intimately related to stop loss placement obviously, and crucial topics in their own right. But, we are focusing here in this lesson just on stops, be aware that stops are paramount and take precedence over targets, in a way, stops are a qualifier for the target and overall risk reward and will effectively help you filter trades you should take and should not.
Stops are crucial to managing risk because once we find the stop loss placement we can then determine our position size on the trade and then we know ahead of time the cost and risks of the trade. As part of our trading business plan, stops are a cost of doing business as a trader, they are also there to force us to get out if we are wrong on a trade, despite our emotional bias towards staying in a trade, which in the end can cost us dearly if we were to hang onto a loser until we blew out our account balance.
A properly placed stop loss is truly the starting point of a successful trade. It allows us to proceed with calculating reward targets on trades and position size, effectively allowing us to execute our predetermined trading edge with a clear mental state and discipline.
Traders who do not focus on stop loss placement first or put a lot of importance on doing it right, are doomed to fail and blow out their accounts. To learn more, click here. I am new to the business, l will need good guidance to make profitable trades, l indeed find your article helpful, this is my first time of coming across it. Looking forward to becoming a full time member of your community. Its a great pleasure to learn as a begginer in the market and i wish to learn more so that oneday i can make a better profit.
Thank you for sharing Nial. Keep up the great work that you are doing. This is great post and I have experience it. I have lost many trade any time i trade with tight stop loss. I think that proper placement of stop loss is the first thing to learnt for successful trading. Great article Niall — thank you. I have witnessed this quite a number of occasions, not knowing how to put a stop loss properly is simply not knowing how to trade.
I almost blew my account by placing wrong stop loss, being too greedy…when i was down to my last dollars, i had my Aha moment on the stop loss and 2 to 1 ratio. Now i am back to my profitable days and peaceful sleep. Your email address will not be published. Notify me of follow-up comments by email. Notify me of new posts by email. Any Advice or information on this website is General Advice Only - It does not take into account your personal circumstances, please do not trade or invest based solely on this information.
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Please remember that the past performance of any trading system or methodology is not necessarily indicative of future results. The theory behind placing stop losses like a pro trader The first thing to understand and drill into your head about stop loss placement is that you should NEVER place a stop loss based on some random amount of pips. This is NOT proper stop loss placement and it is definitely NOT how professional traders place their stop losses… A stop loss should typically be based on a level in the market.
Make note of the end results of both trades… Notice in the chart below the trader placed his stop loss at an arbitrary 50 pip distance from entry. Conclusion A properly placed stop loss is truly the starting point of a successful trade. Christmas Trading Course Special: Checkout Nial's Professional Forex Course here. Mohammad Hafiz June 19, at Thank you for this article.
Thank you for a nice article. Adewole Elizabeth December 24, at 9: Sitlheko October 15, at 3: I would like to learn more about Forex. Can you please induct me more Reply. Looking forward to becoming a full time member of your community Reply. Sufian October 8, at 8: Dominique Lecrompe October 4, at 9: Thanks Mr Fuller for this very good article on stop placement. Billy Mancwe August 18, at Good article thank you Reply.
Jason July 11, at Mqondisi Mkwebu July 11, at 7: I would like to convey my gratitude with powerful learning lesson i receive from you. Olatunde July 11, at 7: Thanks a great deal. George Botoman July 10, at 2: This lesson is worth its salt. Lawrence July 10, at 2: David July 9, at 7: Anne July 9, at 2: Sultana Parvin July 8, at Excellent post about proper SL placing.
Nial proves his experiance in every lesson. Sthembiso July 8, at 5: Daniel July 8, at Leave a Comment Cancel reply Your email address will not be published. Recent Popular Comments Nial Fuller. Price Action Trading Patterns: Thank you, Nial and team Always valuable, helps me keep on track I can already imagine myself like a forex traider This is a very good articleMore...