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Stop Loss Rules Explained

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There is a relationship between the trade size and the stop loss. Always move the stops closer to your current position when adjusting your stops due to an increase in trade size. An increase in trade size is usually caused by adding on or scaling in to a winning position. This lowers the risk in relation to your larger trade size.

Many traders want to know about moving stops based on different time frames. As a rule, always set your stops on the same time frame as you entered your trade. For example, if you had used a daily chart to enter your trade, use the daily chart to set your initial stop.

For day traders there is a risk when holding a trade overnight. In day trading, you are supposed to close your position at the end of the day. Sometimes an opportunity arises and you decide to continue the trade overnight. There is always a possibility of unforeseen event occurring during the night.

In stock trading, unexpected event may create a gap open. This may adversely affect your account value. Suppose you are trading a 15 minute time frame. Therefore your stop loss and position size are based on the 15 minute time frame.

5 minutes before the close of the day, your trade is profitable and you see much more profits if you hold the position overnight based on your 15 minute chart. How do you decide to take the decision to let the trade continue overnight?

Consider the following 5 rules. 1) The 15 minute chart must indicate a solid trend in place. 2) You should place a new stop loss based on your daily chart. 3) The trade must currently be profitable. 4) Your risk should be no more than 2% of your trading account based on your new adjusted stop from the daily chart. Reduce your trade size. 5) When the market opens the next day, be sure to monitor your trade.

The better your stop strategy is, the more profitable you will be. So it is crucial from the profit point of view to refine your strategy. The most common thing that can happen in case of a poorly placed stop loss is that you will get stopped out on a correction. After being stopped out, the market will race back in the direction you were initially betting on.

Now you should keep this in your mind that there are no perfect stops. There is also no way to time the market perfectly. Your goal should be to get the probabilities in your favor by choosing a risk/reward ratio of at least ". This risk to reward ratio will also tell you about the placement of your initial stop loss. Just don't forget, getting repeated stopped out will add to your commission fees and spreads making your trading cost higher.


ABOUT THE AUTHOR: AHMAD HASSAM
Mr. Ahmad Hassam has done Masters from Harvard University. Try This 1500 Pips A Day Forex Signal Service from heaven! Learn These Candlestick Patterns! http://www.ninjatraderblog.com/trading/2009/10/candlestick-patterns/

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