Setting a stop loss is probably the most overlooked and misunderstood part of the trading “puzzle”…
Aside from the specific trading strategy you use to navigate and trade the market, “where to put your stop loss” is probably the most important aspect of any trade.
One of the core tenets of my trading approach that I instill in my members is the importance of using wide stop losses. Many traders are naturally drawn and tempted to place the tightest (smallest) stop loss possible on a trade. There are multiple reasons why traders do this, but they all point to a lack of understanding of important aspects of trading such as position sizing, risk-reward ratios, proper stop-loss placement, and the use of wider stops. It is due to
This lesson will dispel some of the most common myths and misconceptions about stop loss placement, help you plan your stop loss placement correctly, and not act emotionally when placing your stop loss (e.g. avoid placement) helps you understand how important things are. Tight and in a price range that is likely to hit.
First, a note about position sizing.
I’m surprised how many people email me daily believing they should use a tighter stop loss because their account is small and a stop loss that is too wide would make trading too costly is. The notion is that tightening the stop loss somehow reduces the risk of the trade or (which is equally wrong) allows you to increase your position size, thus increasing your chances of making a profit (erroneously ) comes from belief.
90% of the new traders I talk to still believe that a smaller stop loss distance means less risk and a larger stop loss distance means more risk. However, these ideas are not quite true, and for experienced traders who understand trading position sizing, it is not the stop loss distance itself that determines the risk per trade, but rather the contract size (number of lots) traded. ) is clear. The stop loss distance is not as important as the position size you are trading. It is your position size (lot size) that determines how much money you risk per trade.
Adjusting the number of lots traded increases or decreases the amount of money at risk on a particular trade. For example, on the Metatrader platform I use,, Position size is labeled as ‘volume’ and the higher the volume, the more lots you take and the more risk you take on each trade. If you want to reduce your risk, reduce the number of lots you trade. The stop loss distance is only half of what determines how much money (risk) you can lose on a particular trade. If you are adjusting your stop loss distance but not your position size, you are making a serious mistake.
To put this into perspective, a trader can risk the exact same amount whether they set a stop loss of 60 pips or a stop loss of 120 pips, just by adjusting the number of contracts they trade.
example:
Trade 1 – EURUSD trade. With a stop loss of 120 pips and a 1 mini lot trade, you risk USD 120.
Trade 2 – EURUSD trade. A trade of 60 pips stop loss and 2 mini lots has a risk of USD 120.
As you can see, we have two different stop loss distances and two different lot sizes, but the dollar risk is the same.
It is also important to note that increasing the stop width does not reduce risk reward, as risk reward is relative. If you have wider stops, you will need wider targets/rewards. Daily charts and wide stops can produce great trades around 2 to 1 and 3 to 1 or more. You can also use pyramiding to increase your risk-reward yield.
Why are there wider stops?
So, now that we know that any size account can use a wider stop loss, the following question is asked. why Should I use wider stops and how can I implement the same in my trading?
give the market room to move…
How many times have you had the market direction or trading signal right but still lost in some way? Very, very frustrating. So why does this keep happening to you. Your stop loss is too narrow!
Markets move erratically, sometimes with high volatility, without warning. As a trader, it is part of your duty to factor this into your decision-making process when deciding where to place your stop loss. You can’t put your stop loss a certain distance on every trade and “hope for the best”.it doesn’t work and is not a strategy.
You need to make sure the space can withstand the normal ‘vibrations’ of the daily market. There is something called the market’s Average True Range (ATR), which shows his average daily range for a given time period. This helps you see the recent and possibly current volatility of the market. This is what you need to know when deciding where to place your stop loss.
If there are days when EURUSD moves more than 1% (more than 100 pips), why set a stop loss of 50 pips? But traders do just that every day. Of course, there are other factors to consider such as trading timeframes, setting the specific price action to trade, and the surrounding market structure. More on this in my professional trading course.
Below are two images. The first is his EURUSD daily chart showing ATR above 100 and close to 100 for consecutive days. Second, crude oil shows a similarly large daily ATR (above $2 on many days). Traders who are not even aware of the ATR of the market they are trading in will be at a huge disadvantage when setting stop losses. At least the stop loss should be larger than the 14-day moving ATR value.
Crude Oil ATR: Crude oil is measured in dollars and cents, but ATRs above $2 and even ATR above $1.75 per day are relatively expensive. Don’t worry, if you don’t put a stop on the outside of this ATR, you’ll get burned.
Wider stops mean longer trade execution times
As you know, when trading price movements based on the end-of-day approach that I use, it can take days or even weeks for big trades to unfold. You cannot catch 200-300 points movement of EURUSD with stops of 30-50 pips. In most cases, you will be stopped out long before the market moves in the right direction.
Examples and points: The two images below show the same EURUSD tail bar signal, but with different stop loss placements.
The first image below shows a narrower stop loss and the second image below shows a wider stop loss. Looking at this example, it is clear why we need a wider stop loss.
Note that the stop loss for the broader scenario shown below is placed at the 1.1528 area, 20-30 pips below the support level. This is often a good technique to use.
Now let’s take a look at the example daily crude oil chart below. This time there is a very obvious double pin bar buy signal that has recently formed on the daily chart timeframe. Note that if you set your stops low just below the pinbar, as many traders like to do, you would have been stopped out with a loss just before the market moved up if you hadn’t participated.
Now, if I set my stop loss around 50 points below the pin low, it would have been foolish not only not to stay in the trade, but also to make a big profit after the price started going up again. It will be.
Note: Whether you are using a market entry or a 50% Tweak Entry, even the more conservative 50% Tweak Entry, a wide stop loss will dramatically change your trading results. The goal is to stay in the market until you are clearly proven wrong, not just get shaken off by the natural daily price movements. Give the market the room it needs.
I don’t day trade, so wide stops are essential
If you’ve been following me for a while, you know that I don’t day trade. My take on day trading is that it’s just betting on the natural ‘noise’ of the market that happens every day, and I’m a trader, not a gambler. Therefore, it is important to use a wider stop loss to avoid getting caught up in the short-term intraday noise of the market.
This is an interesting “coincidence” (not really a coincidence). Day traders naturally use very tight/small stops (some use none!). Statistics show that day traders usually lose money and perform worse than long-term position traders. . Is it just a coincidence that those who use narrow stop losses tend to lose more money than those who use wide stop losses and hold traders longer? I’m afraid not.
Long term trades require a larger stop loss. If you know that EURUSD moves by a few percentage points per week (say 200-300 pips) and you are looking to set a price movement that could result in a profit target of 200-300 pips, then do the following: is a matter of course. A wider stop loss is required to continue that trade.
Keep in mind that the power of higher time frame charts is immense. Sure, you’ll have to wait longer for a trade to take place on a higher timeframe, but in return you’ll get more accurate signals and the higher you go to the higher timeframes, the more likely you are to call the market. much easier to do. Therefore, the higher the timeframe, the less gambling and more skillful trading becomes. For many reasons, the daily chart timeframe is my favorite and happy medium.
Lifestyle and stress reduction
Perhaps the biggest benefit for you is that using a wider time frame reduces stress and improves your lifestyle. You can set a trade with a wider stop loss and forget about it. Wider stops is what my end-of-day trading approach encourages, and it means you don’t have to sit there worrying about each tick of the market.
This trading style allows you to spend more time learning and focusing on finding good trades, identifying trends and price action patterns, and reading footsteps on charts. Precious things!
If you want to step back and relax from trading while the market is doing the “heavy lifting”, simply use a wider stop loss and adjust your position size to maintain your desired dollar risk per trade. that’s it!
Conclusion
Let me ask you a question…
Do you know why most traders fail in the long run? Yes, they lose too much money. But why would they lose so much money?
There are two main reasons why so many traders lose money and blow their accounts. Overtraded (overtraded) and too narrow a stop loss (not giving room to trade).
Interestingly, once you start putting tight stops, you start getting stopped out more often. Of course? But every day, thousands, perhaps millions, of highly intelligent traders do something truly unintelligent. They set a small stop loss on a perfectly good trade setup. Either they do this because they don’t understand position sizing, or they do it because they’re greedy, and either way, they’re destined to fail and become just another statistic.
don’t be like them.
be patient. Be willing to set wider stops even if it means leaving the trade for a few weeks. Ask yourself. 20 trades with tight stops and losing most of them, and 2 trades with wide stops, one big win and one with a predefined 1R loss. And which one is better? I promise you, the latter, not the former.
Read this lesson carefully again. It may be the most important trading lesson you’ve ever learned. If you combine the concepts I teach here today with the trading techniques and price action strategies I teach in my trading courses and the daily guidance from my members’ trade setup newsletters, it works great if followed. You get a fairly powerful long-term trading strategy. This is your chance to get closer to stable success in the market.
What did you think of this lesson? Please leave your comments and feedback below.
If you have any questions, please email us here.