Let’s face it…
Top traders understand that having a stop loss is vital to protecting their accounts.
It’s crucial to not enter trades without them, right?
But at the identical time…
What’s it that makes them so tricky to master?
Because at one point, I’m sure you’ve asked yourself:
“Why do I keep getting stopped out so early?”
“Does my broker hunt my stop loss?!”
Well, in today’s guide, I’ll teach you the perfect stop loss technique to manage your trades and protect your account on a complete latest level!
Specifically, you’ll learn:
- The reality about stop losses (how they work, and a deep-dive into your trading psychology on why they’ll hurt)
- The BEST practices for setting your stop loss so that you just’ll never second-guess yourself when placing them again
- Time-tested trading indicators that show you how to place your stop loss no matter your trading methodology
- Crucial notes on how NOT to make use of stop losses
I realize it hurts each time your stop losses get hit, to the purpose that you just’d start blaming your broker, indicator, and even your mentor…
This training guide goals to alter that!
It’s time to point out you ways stop losses provide you with an edge within the markets, helping you to develop into a more independent trader.
So, are you ready?
Then let’s start!
Best Stop Loss Strategy: How Does It Work, And Does It Protect Your Account?
Let’s get to the fundamentals…
A stop loss is a form of order you place within the markets where if the worth hits it…
…you exit the trade…
…and your position gets liquidated.
That’s right, a stop loss makes your losses “real” within the markets.
Which hurts – I get it!!
But at the identical time, having a stop loss protects your account from huge potential losses equivalent to this…
So, it just is smart to have them there, right?
But, how come this happens so often!?…
You begin to inform yourself…
“Argh!! If I’d just held on to my trade a bit longer, it could’ve been a winner!!”
“I knew I shouldn’t have had a stop loss!”
OK, but seriously… Did you ever wonder what causes this to occur?
How come the market at all times seems to know where your stop loss is placed?
Why do you usually get “stopped out?”
Listed here are three potential reasons to take into consideration…
1. You’re placing your trades near high-impact news
That is just about common should you trade the lower timeframes within the Forex and Stock markets.
As chances are you’ll know, there’s a “spread” in every market.
It incorporates the bid and ask price (which are often close to one another)…
Every time high-impact news occurs, what happens is that there’s a sudden surge of liquidity within the markets!
The result?
Well, it widens the spread!
But… then what happens?
You guessed it!
Your stop loss suddenly evaporates instantly…
This is the reason it pays to know when high-impact news is released (as these changes occur inside split-seconds!).
It’s a useful option to understand when not to position your trades.
Again, this is applicable more to those trading in lower timeframes…
Higher timeframe traders will typically experience this less.
Now, one other potential cause…
2. Your stop loss is placed too tight relative to the market condition
As you already know…
Not all markets are the identical.
And yes, I mean it!
Take a take a look at this…
…after which this…
You may safely say that they’re trending markets, right?
Nevertheless, their behaviors usually are not the identical.
As such, the way you place your stop loss must also be different, right?
So, taking a more in-depth take a look at the examples again…
…where do you think that you’d place your stop loss?
That’s right, like this…
Tighter stop loss on strong trends…
…with a wider stop loss on choppy trends!
And yes, this philosophy also applies to ranging markets, too.
Not all of them are the identical!
Some ranges are small, while some range markets are erratic and really choppy…
3. You don’t know the rationale why your stop loss is placed
I need you to recollect this quote from Bruce Kovner, one in every of the Market Wizards:
“Place your stops at some extent that, if reached, will reasonably indicate that the trade is flawed”
That’s the REAL purpose of getting the perfect stop loss strategy.
It’s meant as a option to let you know that your trading idea is flawed!
So, at this point, you’re probably wondering:
“What’s the answer, then?”
“What are some ways on how I can improve my stop loss placement?”
Well, don’t worry, my friend.
Because in the following section…
I’ll reveal the secrets it’s essential to implement the perfect stop loss strategy and prevent loads of heartache out there!
So, read on!
A Cheatsheet On Having The Best Stop Loss Strategy
Able to get right down to the nitty-gritty details on how you can set your stop loss properly?
Good.
Because on this section…
I’ll share with you the perfect stop loss strategy for price motion traders.
First…
Beyond Support or Resistance
As you already know, support and resistance act as “barriers” in your price chart.
Nevertheless, the reliability of those barriers is dependent upon how the market reacts to them.
If the market reverses from an area of support…
This tells you that the market has recognized such a level and might potentially proceed going higher.
That’s right; it implies that your support line isn’t any longer an “imaginary” line.
However, if the market breaks an area of support…
This tells you that the market can potentially go even lower.
After all, this illustrates that support & resistance levels can fail…
…and it’s exactly why you wish to see how the worth reacts to such a level, and that’s why you wish a stop loss!
So, how do you go about it?
First, be certain that you plot your relevant support and resistance levels…
Next, is to attend for a legitimate setup which on this case is a false break setup at the world of support…
And, where do you place your stop loss?
Below the world of support, in fact!…
And if it’s a false break at resistance, then place your stop loss beyond that area of resistance…
At all times remember, this idea can still apply even should you trade different setups!
So what’s next…
Beyond a Trend Line
Unlike Support & Resistance, that are mostly helpful for ranging markets…
…using a trend line is an incredible tool to find out the world of value in a trending market…
At the identical time…
It might be an excellent basis on where to position your stop loss as well, no matter any setup…
Alright?
Now there’s one other piece of recommendation lurking here…
Beyond a Chart Pattern
This part is something that I could not cover completely today.
Why?
Take a take a look at this…
…err, there’s lots of chart patterns out there!
While I could not give you the chance to cover all of them today, the most important principle is that this:
At all times know when a chart pattern gets validated (entries)…
…and…
…when it gets invalidated (stop loss)!
For instance, a head and shoulders get validated when the worth closes below its neckline…
A legitimate entry trigger, right?
Now, when does it get invalidated?
Well, when the worth reverses back from its neckline and breaks above the suitable shoulder!…
See what I mean?
Not only do you will have a legitimate reason for entry – but in addition an incredible reason for exit!
I mean, I need us to be on the identical page here…
The rationale why I share these concepts is just not only to scale back your possibilities of getting stopped out prematurely…
…but to at all times discover a reason behind your stop loss!
That is smart, right?
Nonetheless, be at liberty to learn more about these concepts intimately here:
Support and Resistance Trading Strategy — A Beginner’s Guide
The Trend Line Breakout Trading Strategy
The Essential Guide to Chart Patterns
Now…
When you desire a much simpler option to place your stop loss, then I actually have the suitable set of tools for you in the following section.
So, read on!
The Best Stop Loss Strategy Indicators For Every Type Of Trader
Do you already know what the perfect thing about this section is?
It’s that all the things that you just’ll learn on this section could be used with the concepts I shared with you earlier!
Moreover…
What I’ll show you here is very helpful should you are a “systematic” trader who desires to trade with black-and-white rules.
So, are you ready?
Then let’s start!
Super Trend Indicator
This indicator is fairly easy, because at first glance…
…I believe you already know where your stop loss ought to be!
So, if you wish to take long trades, base your stop loss on the green line!
For brief trades?
The red line!
But the actual query is, how does this indicator produce such a signal?
What’s the perfect setting to make use of?
Well, when it comes to settings, you usually wish to ask yourself this:
Which setting is essentially the most suitable for my trading style?
Let me explain…
If you wish to capture short-term trends, then using this setting will help…
For medium-term trends, you may consider this…
Finally, should you’re a trader who desires to capture long-term trends, then this setting may help…
After all, you don’t need to copy the precise settings!
However the principle is to decide on the “relevant” period based on how you wish to manage your trade.
(And this is applicable to any indicator you’ll use!)
So, going back to the query:
How does this indicator get its values?
Simply put, this indicator is only a visualization of the…
Average True Range Indicator
What the ATR indicator does is measure the volatility of the marketplace for a given period.
For instance…
If the ATR indicator value shows that the volatility over the past 20 days is 70 pips…
Then you wish to stay out of that volatility by having a stop lack of greater than 70 pips!…
This is identical principle as how the super trend indicator is calculated.
Nevertheless, it’s tailored for trend followers.
But should you are a variety trader…
Then you definately can consider utilizing the ATR indicator across different concepts!
Resembling subtracting 1 ATR below the world of support…
Or adding 1 ATR above the suitable shoulder of the pattern…
Is all the things beginning to fall into place?
Well, finally, now we have the Donchian Channel indicator…
Donchian Channel
Now, in comparison with the previous indicators I shared with you…
This might be the simplest to know.
At the identical time, it might each be used to base your entries and stop loss.
Let me explain…
The Donchian Channel simply represents the highs or lows in your chart.
For instance, if you wish to search for the very best highs during the last 50 days, the Donchian Channel’s got you covered!…
What’s wonderful about this indicator is you could use it to enter and exit your trades.
On this case, you may consider entering the following candle open if it makes a 50-day high close…
At the identical time, place your initial stop loss on the 25-day low, which is half the period of your Donchian channel entry…
In order that as the worth moves in your favor, the Donchian Channel also can act as a trailing stop loss!…
Pretty amazing, right?!
An all-in-one indicator that may enter, manage, and exit your trades!
Now…
This section is supposed to “spark” your ideas as a trader.
To get some ideas on how you may immediately improve your current strategy.
Nevertheless, should you desire a deep dive into these indicators, you may check these out:
The Ultimate Guide To Supertrend Indicator
Donchian Channel Strategies That Work
The Complete Guide to ATR Indicator
So, now that you already know the perfect stop loss strategy on the market…
How do you have to NOT place your stop loss?
In spite of everything…
Confidence is built by consistently executing trades accurately…
…and having the discipline to know and avoid bad practices in trading, right?
It’s knowing each when to act, and when to not act that matters!
So with that said…
What NOT to do when using the Best Stop Loss Strategy
A few of these problems have already been solved in the sooner sections….
Nevertheless, it’s at all times best that you just keep them in mind.
So, the very first thing NOT to do is to…
Stare at your screen when the worth is near your stop loss
I do know.
It hurts each time the worth hits your stop loss.
Nevertheless, looking at your chart only puts you at a mental drawback!
It’ll only serve to make you more frustrated…
And what happens while you get frustrated?
That’s right!
You begin taking more risks…
You may even start exiting trades too early!
Have you ever ever been through that before?
So, on this case, what’s the answer?
Easy – have a trading routine!
Understand when to ascertain and when not to ascertain your trades…
After all, there’s more to it, so be at liberty to ascertain it out here if you wish to learn more.
Next…
Moving your stop loss or removing it altogether
There are lots of cases where traders suddenly turn into “investors.”…
And just reading that, I’m sure many traders already come to mind!
Every time they experience an enormous loss, they don’t cut their losses!
As an alternative, they turn into “investors!”
And I’m sure you may’t deny…
This is just adding more fuel to the hearth.
Why?
Because you usually enter a trade with a selected trading idea, right?
And once the market invalidates that trading idea, you will have two decisions:
- Accept that you just’re flawed, cut your losses, and move on to the following trade
- Keep the trade, and “wait” until you’re right
After all, I don’t blame you should you go for the twond alternative.
Nevertheless, take note that it will set you back as a trader…
It is going to block you from learning latest things as you retain your attachment to your trade.
(I do know—I’ve waited 2 years before for a stock simply to breakeven!)
But should you go for the primary option…
This may help you easily learn out of your losses and show you how to improve your decision-making in the following trade!
Again, what’s the answer?
Well, I’m sure there’s more to this than simply a fast fix.
But at all times having a technical reason behind a trade (which I’ve taught you within the previous sections) in addition to cultivating the suitable trading habits, will show you how to overcome this.
With that said, let’s do a fast recap of what you’ve learned today…
Conclusion
I’m sure you realize by now…
Knowing and executing the perfect stop loss strategy is different from actually following it with discipline.
By honoring your stop loss, it means accepting a loss or – perhaps just accepting you’re flawed!
And oftentimes, latest traders (or gamblers) let their egos get the perfect of them.
Nonetheless, here’s what you’ve learned today…
- Brokers and institutions don’t “hunt” your stop loss, nevertheless, avoiding high-impact news and placing the suitable stop loss depending in the marketplace condition can show you how to stay on the trade longer
- At all times put your stop loss at a technical level, equivalent to placing it below support or above resistance, beyond your trend line, or when your chart pattern gets invalidated
- Indicators equivalent to the super trend indicator, average true range, and the Donchian channel will show you how to systematically place your stop loss without second-guessing yourself
- Develop a trading routine on when and when not to ascertain your charts so you could consistently honor your stop loss and use it as a learning experience to enter your next trade
Well – there we’re!
I hope that this trading guide has been insightful for you!
It’s time to use a few of these concepts and immediately improve your current trading plan.
So, over to you…
What are a few of your stories in terms of stop loss?
Have you ever experienced moving your stop loss or removing it altogether?
Let me hear your story below within the comments!