Stop Loss: How to set it correctly?

One of the most common mistakes among novice traders is stop loss (Stop Loss) is too small. As practice shows, setting the stop loss level at 10-30 points from the entry point is almost always unprofitable.

The Psychology of Small and Large Stop Losses

The psychological aspect here is absolutely clear - the trader is trying to reduce the possible loss from the transaction to a minimum. In fact, the probability of getting a loss only increases, because the small size of the stop loss provides practically a jewelry entrance into the market at the very peaks or troughs, and even that does not give a hundred percent guarantee. In fact, setting a small stop loss is a kind of reinsurance, which knowingly leads to losses, and quite hurtful.

It is worth noting that this process has a flip side of the coin - after getting burned by small stop losses, or "having missed" the calculated entry point, the trader begins to set larger stop orders, with the reserve, according to the principle "now it will definitely not hit". This practice is also unprofitable. Despite the fact that the enlarged stops trigger less often than the reduced ones, the loss on them is comparable to the total loss on small stops.

Price noise

The movement of a currency pair less than thirty pips at the currency market is usually considered a price noise. In some currency pairs, such as GBP/JPY and EUR/JPY, a movement of up to 50 pips is considered noise.

The dynamics of such "noise" is naturally impossible to predict, because it is a random process. Therefore when setting a stop-loss it is necessary to take into account the "nature" of the currency pair, otherwise, even in the case of a correctly performed analysis and entry into a position, the market will simply "eat" the stop with price noise and continue to move in the desired direction.

"Hunting for Stop Losses in Forex

Among traders The theory of "foot hunting" has long been cultivated. There is a lot of evidence and refutation of this theory, you can believe it, and you can not believe it. However, there are still some points to keep in mind.

In fact, the average trader has almost no influence on the movement of a currency pair. As the signature of one of our participants reads of the forum"Let's move the market with our pennies! Nevertheless, there are large players in the market who have a direct impact on the movement of currencies. For example, a large bank, buying or selling currencies in large amounts, is able to move the quotes by those 10-30 points. The story of "Soros vs. the pound sterling" is quite instructive in this regard. Of course, the operations similar to the one performed by Soros are extremely rare in the market. A very limited number of players can move a currency pair by 50, 100 or more pips. However, a shift of up to 30 pips is a thing quite feasible for big banks and takes place in the market quite often.

To summarize, it is important for the beginner trader to find the right stop loss for his trading style. It is necessary for the stop-loss to be triggered exactly when the trend changes direction, not as quickly as possible. Simply put, a loss on a trade must be received only when there are concrete signs - the price is or will soon go against the trade, and there is almost no chance for the resumption of movement in the desired direction. In other cases it makes no sense to fix a loss on an open trade.