Stop losses are a topic that divides a lot of traders. Ultimately, just like trading, there’s a lot of ways to accomplish what we want through stop losses. There is not a right or wrong way to use stop losses. Each trader is going to have to determine themselves why they are making the trade and why they would want to exit the trade if it goes against them.
No doubt, there will be some trial and error involved. For new traders, typically the problem is setting stops that are too close to where you enter a trade. They are so afraid of losing money that they don’t give any room for movement. Currencies can be very volatile at times. There will always be days of up and down movement or hours or minutes of up and down movement. Just because a currency is moving against your trade at this moment does not doom the trade. It is just part of the normal movement.
On the flip side, some traders give lots of room for the pair to move so that by the time the stop loss is reached, an enormous loss has occurred. We have to find a happy medium. Of course, shorter term trades will be given less leeway. Longer term trades will be given more room for movement. In either case, we want to make sure that our stop loss would not yield a loss that is greater than our potential reward. Preferably, we want to have a minimum 2x reward over our loss. If we expect a 200 pip movement in our favor, we should not allow a stop loss greater than 100 pips. It is also helpful to predetermine our stops before we enter the trade, instead of entering and just seeing how things go.
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