Advertisement

Stop Loss Rules

Advertisement
Don't pick an arbitrary place to put your stop loss. Position your stop loss in relation to the market activity. Many traders incorrectly choose a stop so their loss is the same amount each time they are stopped out.

But by doing this they are completely disregarding the meaningful market support and resistance levels where the stops should be placed.

Try to set your initial stop 3% below the support level. The important thing in this method is to correctly identify the support area. Test this method and see if it works for you.

Support and resistance is a concept that every trader should understand. Knowing correct support and resistance is very important for a trader. This you will learn with experience. For example, suppose you have a trading system that can determine an entry point. However, your trading system does not provide an exit based on the market dynamics. First you need to identify the support area. Set your stop loss 3% below the support area.

The formula that you will use is (Support Price)*0.97(3% less) = Initial Stop Loss. For example, suppose that the support level in a bullish trend is $30. You should set the stop loss at 3% below the support level in a bullish trend if you have an area of support at $30. The formula that you will use is $30 (support price)*0.97 (3 percent less) = $29.1 (Initial Stop Loss Level).

Never disregard current market conditions it will affect your profitability seriously. For example to say that you are willing to lose $200 in a trade is to disregard the current market conditions. Do not use arbitrary stops based on flat dollar amounts that you are willing to lose.

You are inviting failure if you do not use stops at all. Another good approach to place stop loss can be to set your stop loss one tick below the support in a bullish trend or one tick above the support in a bearish trend.

For example in trading stocks, you are in trouble if you do not use stops and hang on to a losing trade to the point that you emotionally feel that the loss is so large that you cannot exit the trade.

Some markets have sharks in them. For example in the currency market, the brokers have many tricks up their sleeves. In the currency market it is better not to put the stop actually in the market when you have the position on. Some professional currency traders use mental stops only. Your broker will see your stop and if there are enough similar stops, the broker may try and hit your stop. This way the broker makes money and you do not.

You can set a mental stop and get out quickly if you are hit in such a market like the currency market. But this will need psychological toughness and discipline to get out when you are supposed to get out.

You can move your stops to lock in profits as new trailing stops are determined. You must adjust your stops to keep your risk in relation to your trade size in case you add on to your winning trade by increasing your trade size. Never move your stop for emotional reasons especially when it is your initial stop.

Always move the stop closer to the current position to lower the risk in relation to your larger trade size when adjusting your stop due to an increase in trade size.


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/

Share Article


Sponsored Links

Related Articles