The trader's profession: stop-loss or how not to lose
Igor Dombrovan, Managing Director of Saxo Bank in Russia
Date of birth: April 25, 1970
Igor Dombrovann graduated from Moscow State Technical University and worked for almost ten years as a financial analyst in the Moscow office of EVU Management Limited, European Investment Fund. For the last six years of his work in EVU Management Limited, Igor Dombrovann has held the position of Chief Financial Analyst. Within the framework of his activity Igor carried out complex analysis of investment projects of production companies, monitored their operations and investment efficiency, analyzed the Russian stock market and formed the investment portfolio and strategy of the fund on the Russian market.
Stop loss or how not to lose
Class: Trading Profession
Like any other profession in the financial sector, the profession of trader requires a specialist to follow certain rules and principles to achieve maximum success. High-performance traders are those who have established clear rules of money management to regulate their trading.
What does the concept of "funds management" mean? Let's try to understand this question.
When making a decision to participate in a transaction, a trader assumes a great deal of responsibility, so he must carefully consider and weigh his decision. The use of three rules of money management will help him in this:
- It is necessary to trade thinking about tomorrow;
- You need to know what you are willing to risk;
- You need to know how to determine the size of a trade deal.
Let's take a closer look at each of these points.
It is necessary to trade thinking about tomorrow
Regardless of whether the trader was right in his choice or not, if he trades thinking about tomorrow, he knows that he will have another chance. Thus, following this rule creates an undeniable advantage.
It is worth noting that if a trader takes unreasonable risks, he is driven by a sense of greed. This feeling pushes traders to search for one technical indicator or one economic report, based on the indicators of which they can no longer worry about losses in trading. This is often referred to as the "secret" of investing.
Unfortunately, all these searches and hopes are in vain because there is no secret. Of course, it's possible to find technical indicatorBut the market is changing, and soon a completely different indicator may become relevant.
It is more correct to treat each open position as one of many attempts, and it is impossible to predict in advance which of them will bring profit and which will bring loss. If the market situation does not develop as planned and the position becomes unprofitable, you should close it without regret. Profitable positions should be strengthened, but strictly within the framework of the risk management strategy. In order to automate this process and thus remove the emotional factor, professional trading platforms, including Saxo Trader, allow you to simultaneously place related orders to limit losses (stop loss) and to fix profits (take profit).
You need to know what you are willing to risk
This rule is the basic principle of trading with an eye on the future. If you don't risk too much of your account today, you will know that you will have enough money tomorrow. You don't know what might happen in the market, so you won't want to bet everything you have on one position.
The first thing to do is to determine, what percentage of your account you are willing to lose in a single trade. Once this issue is resolved, the rest is pure math. Most traders prefer to risk about 2% of their entire account balance in a single trade. This is just a general rule of thumb, and you need to decide for yourself how bold or conservative you want to be with your trading account.
The only thing you should be doing avoid extremes. For example, if you are willing to be more daring, you can bet on a single trade from 2% to 5%. If you want to be more conservative, you can risk from 1% to 2%.
You can calculate the degree of risk using a simple formula:
Account balance * risk percentage = amount at risk
Here's an example. Let's say your account balance is $50,000 and you are willing to risk 2% of your funds in one trade. Substitute these figures into the equation and we see that you should not spend more than $1,000 on this trade.
If we are talking about several trades, the amount at risk on the account can be larger. For example, if you have three trades open at the same time, you can risk no more than $1,000 on each trade, which will total $3,000.
Determine the size of a trade transaction
The size of a trade is defined as the amount of currency you buy in a single trade. Once the risk has been determined, it is necessary to calculate how to organize the transaction so that you do not end up losing more than planned.
To determine the size of the trade, you need to decide where to bet stop loss. When the stop loss has been determined, it is necessary to calculate the number of pips in the gap between the entry point and the estimated stop loss point. This can also be calculated using the equation.
Amount at risk / (points at risk * point value) = trade size
Stop-loss orders
I would also like to tell you about the concept of "stop-loss".
Stop-loss order - is an order to exit the deal upon reaching currency pair of a given price level. Stop-losses allow to protect the trading account from losses, even when the trader is not at the computer.
If you buy a currency pair, you place a stop loss somewhere below the current price to protect your investment in case the exchange rate reverses and starts to decline. If you sell a currency pair, you place a stop-loss above the current price to protect your investment in case the exchange rate reverses and starts to rise.
As an example, consider the EUR/USD pair at 1.4000. Let's say you notice that there is strong support about 50 pips below this price level at 1.3950. Obviously, if EUR/USD breaks this level, the decline is likely to continue. Since you bought the currency pair and will take a loss if it starts to decline, you decide that you don't want to stay in the trade if EUR/USD falls below 1.3950. To protect your account, you place a stop loss at 1.3940, which will take you out of the trade if EUR/USD reaches that level. Whether it's in the middle of the night or in the middle of the day, if the EUR/USD price falls to 1.3940, your trade will automatically close.
That is, stop loss orders provide protection in the trading process and play an important role in all money management decisions.
Take profit orders
A take profit order acts similarly to a stop-loss order, its main purpose is profit taking. If you buy a currency pair, the take profit order is set at the level that the pair can reach, so you fix the planned profit.