Stop loss is an important component of any profitable trading strategy.
Limit the risk of getting it wrong and protect your capital so you can take advantage of the next opportunity.
This complete tutorial shows how to calculate risk and position size based on maximum risk.
Calculate stop loss
The first step in calculating your stop loss is to measure your stop loss in pips or dollars, or whatever is quoted on your chart.
To calculate the exact stop loss, use the formula:
ABS(Entry – Stop Loss) = Risk
It doesn’t matter if the risk number is positive or negative. Take the absolute value (ABS) of the entry price minus the stop loss price.
Let’s look at some examples from different markets. In each example the line represents the stop loss.
Stock trading example
When trading US stocks, risk is calculated in dollars.
In this example, the stop loss is 67.50 and the entry price is 59.60.
Since this is a short trade, the trade is profitable when the price goes down.
So the risk is 67.50 – 59.60 = 7.90.
Forex trading example
In Forex, risk is calculated in pips or pipettes, depending on how the broker quotes the price.
Prices are quoted in the second currency of the pair, or quote currency.
For example, in the EURCHF chart below, the chart is quoted in Swiss francs because CHF is the second currency.
The stop loss is 0.97068 and the entry price is 0.98609.
Therefore the risk is 0.98609 – 0.97068 = 0.01541.
This equates to a risk of 154.1 pips.
Crypto trading example
Cryptos can be a bit tricky as trading pairs are quoted in different formats depending on which crypto is the pair’s quote currency.
This is a Monero/USD pair, denominated in USD.
The risk of this long trade is: 134.23 – 115.332 = 18.898.
Now that you have a good idea of how this works, let’s see how to calculate the percentage risk per trade based on the calculated stop loss.
How to calculate stop loss percentage
After calculating the stop loss for the quote value, it’s time to calculate the position size based on the risk percentage.
This is very important as we want to keep the risk per trade constant.
If you don’t keep your risk constant, you may lose a lot on one trade and not make enough profit on the next trade to cover your losses.
For example, let’s say you risked 3% on your first trade and it was a losing trade. Then you risked 1% and made a profit of 1% on your next trade.
Even if you were 1-1, you would still be 2% down.
If I had risked 1% per trade and targeted a profit of 1% per trade, I would have reached breakeven.
Keeping the risk per trade constant removes one variable from your trades and allows you to focus on more important things like win rates and returns per trade.
For these examples, let’s assume you have a $10,000 account and risk 1% per trade.
1% of $10,000 is:
10,000 × 0.01 = $100
Therefore, for all the trades below, you only risk $100.
Next, we’ll show you how to figure out how much stocks, units, or cryptocurrencies to buy or sell.
We will use the same dollar and pip risk amounts as the example in the previous section.
Stock trading example
In the example above, there was a risk of 7.90 per share for that stock trade.
So to get the number of shares to trade, divide the total risk you want to take ($100) by the risk per share ($7.90).
$100 / $7.90 = 12.6
Therefore, in this example, we need to short 12 shares.
Forex trading example
Calculating the total trade size in Forex can be a bit tricky as there are different lot sizes and the risk per pip varies from currency pair to currency pair.
If you don’t know anything about forex lot sizes, you can learn here.
To make things easier you can use our position size calculator in this way.
But I’ll show you the calculation, so you can do it yourself.
In the example above, the long trade has a risk of 154.1 pips.
Let’s say you want to trade micro lots. These lots have a risk of approximately $0.10 per pip, depending on the currency pair.
However, we will use $0.10 just for demonstration purposes.
First, multiply the pip of risk by the cost per pip.
154.1 x 0.10 = 15.4
This creates a risk of $15.40 per micro lot.
Then divide the total risk by the risk per micro lot.
$100 / $15.40 = 6.49
So, in this example, you can trade 6 micro lots and limit your account risk to 1%.
Crypto trading example
This crypto chart is quoted in US dollars, so the calculations are similar to the stock trading example.
$100 (total risk) / $18.898 (risk per coin) = 5.2915652
Cryptocurrencies can be divided to two decimal places, so in this example you can buy 5.2915652 Monero coins.
If the coin/token you are trading is quoted in another cryptocurrency:
- Calculate risk in quote currency
- Convert the quote currency to USD (or the currency unit of your trading account).
- Divide the total risk ($100 in this example) by the risk per coin/token in USD to get the number of coins/tokens to trade.
that’s it!
easy.
FAQ
What is a trailing stop order and should I use it?
There are several ways to implement a trailing stop loss.
It helps lock in profits as the trade shifts to profit.
You can learn about the most commonly used types of trailing stops here.
That article also explains which ones to avoid.
where to set stop loss
The next question is obviously where to place the stop loss.
It depends on the trading system.
If you want to see different trading strategies, take a look at the strategies I wrote and tested.
But the basic idea is to set your stop loss somewhere that the normal movements of the market are hard to reach.
At the same time, you want to place your stop loss where it shows you are wrong about your trade.
Brokers don’t look for stop losses.
Many new traders believe this because they are frequently stopped.
In practice, most new traders set their stop loss near the entry and are simply stopped by normal volatility.
Here are two examples of stop loss levels chosen by two traders:
New traders usually choose stops too close to the price action…
More experienced traders usually choose further farther stop loss levels, as described above.
So the bottom line is that you need to choose a stop loss price that proves you wrong, but not so close to the entry that you can easily be stopped.
final thoughts
A stop loss is the best way for traders to manage their risk.
…especially new traders.
If you have a trading plan that includes a stop loss, you will know exactly how much you will lose if you get it wrong about your trade.
If you don’t have a trading plan, learn how to create one here.
There are some trading methods that do not use stop loss, but should only be used after a little experience.