Where to Place Your Stop Loss

Are you struggling to find the correct stop loss placement?

Are you unsure where to take profits or setting your target price?  

Are you always getting stopped out?

Then read on ....

I reckon that you've heard it a million times on the forums, "I use a 20 pip stop loss for every trade." Or, "What size stop loss should I use with this system?"

These types of questions indicate a trader who doesn't really know what he is doing, and Mother Forex will take a (huge) cut of his account eventually.

By using a stop loss, that trader is at least protecting his account, but there should be allowances to let your chosen market 'breathe'. They do zig and zag after all, and this is a sign of a healthy market. But on some days those zigs and zags grow in size and could possibly cover many more pips, also known as volatility. This could change day by day.

Using the same stop loss size on every trade will not stand you in good stead when the market turns volatile and will only result in you getting stopped out more frequently IF you do not use the correct stop size.

Use the same stop size every time and .... bye bye..!!

Likewise, if you normally use a larger stop loss and the market is hardly moving, then funds are tied up which could possibly be better employed elsewhere. That larger stop could also be hit as the market creeps towards it. By using a stop loss that is 'in phase' with your chosen market then you are managing the trade correctly. More shortly.

More and more people are now turning to trading the financial markets as a means of retaining the life style that may be eluding them as a result of financial and economic downturns which do not appear to be improving any time soon. People's wallets are shrinking, their digital accounts are not worth what they should be, and the cost of just about everything seems to be rising faster than salaries. Nothing new there then!

This scenario tends to drive people to search for other avenues of income. Hence the upturn in the number of investors and retail traders. The currency market is, by all accounts, the weapon of choice. The forex market.

Now, while exceptional returns can be made from trading forex, the downside is that your trading account can suffer greatly if you do not know EXACTLY what you are doing.

For example you MUST have a plan where your stop loss size is only a small but significant part of you whole Trading Plan. A plan that covers every aspect of your trading, for entering trades willy-nilly isn't trading - it's gambling. And we well know what the outcome of that will be.

There are three parts to a trade - where to enter, during, and where to close the trade.

In the initial stages of the trade it may do one of three things - reverse on you, flat line, or go in your favour. At Black Dog we have all bases covered, we have many ways and means to manage our trades and they usually incorporate some, or all, of the points mentioned below.

In this post we'll talk about four of them only but at Black Dog we keep our eye on many factors.

Before we go on to talking about stops (I do waffle on sometimes, apologies) at Black Dog we also tend to use Pending Orders for the majority of entries, rarely jumping in with Market Orders.

This ensures that the trade and price comes to us. We NEVER go chasing the market. No sir!!

Ok, so we've talked a little about the stop loss above and it surely is one way of managing your trade, so much so that it is #1 below. But there are other ways too, and we'll quickly discuss them to whet your appetite. Keep reading...

How many traders do not use a stop loss when trading? I can honestly say that I have never ever traded without one in over seventeen years of trading. I know what can happen if I fail to do so... and it frightens me. The question is, "Where is the best place for that stop?"

Too close and it is sure to get hit. Too far and we could conceivably be looking at a large loss. We need a happy medium where it has a good chance of keeping us in the trade AND keeping any losses acceptable. With our losses we don't want telephone numbers!!

There are many tactics in achieving this and the best answer is, "Where it will not get hit." But this is rather vague, and can be expensive too. Many traders simply place their stop loss above the most recent high for a sell trade, or just below the most recent low for a buy trade. This is a well-known tactic and may leave you open to the stop-hunters though I'm not sure that such people exist.

The method that I have found to be the most effective is to let the market breathe, to give it some elbow room to do its stuff by using a tool that we will discuss below. If I have placed my trade in the correct direction then I may have to take some heat  as it goes against me a little while it does its zigs and zags. But if I have done my homework correctly and picked the best point of entry I should be ok. Not always, but usually.

When taking a position in any market it is wise to have a point where, if things are not going your way, you can automatically exit that position with a relatively small loss and not wake up one morning staring at a huge loss possibly of biblical proportions. The stop loss will do that for you - it will protect your account.

The idea is to MANAGE the trade.

You don't take a sledge-hammer to crack a walnut ... so why have a large stop loss if aiming for only a few pips?

It must be said that a stop loss will NOT protect you if there is a gap in price. For example, from Friday close to Monday open the price could jump any number of pips up or down. Or should your chosen market close temporarily for any reason. Your trade would be closed at the first  available price. You may use a Guaranteed Stop but would need to pay for this facility. Is it worth the risk to leave a trade open over the weekend, or even overnight?

The question most fired at me has always been, "Where do you place your stop loss?" closely followed by, "Where do you exit, or take profits?"

Trading without a stop loss is like playing Russian Roulette though the stakes are not quite so high - but high enough. One of these days you will get the bullet if those stops are not placed. The markets can, and do, move very fast on occasion. So best to be prepared.

Any good trader will set his stop loss prior to entering the market because he knows that he needs protection whilst at the mercy of the markets. It is a fine habit to get into. You MUST protect your account, it should be uppermost in your mind at the time. It is certainly my first action.

So now that we have decided that we definitely need a stop loss, where should we place it?

How good would it be to have a tool that tells us:

where our stop loss should be at any given time

on any given time frame,

for any given market?

That would be great. But just hang on a sec...

Having a target price where you take your profit is fine if it is in tune with reality, but what should you aim for?

If you are trading the M5 time frame and aiming for a 500 pip target this may be a little on the optimistic side. Similarly, just aiming for the first number that comes into your head is not trading but gambling. There needs to be some structure to your aspirations. It's usually a good idea to aim for what the market is offering. The beauty of this is that the market can tell you what is on offer.

Trading with clenched bum muscles and clumps of hair scattered around your lovely office chair is not a good sign that things are going smoothly. Take those profits and run. IT DOES NOT MATTER if the market moves further in your favour after you have closed the trade. Take your profit and look/wait for the next trade. NOW we are getting organised. 

But what should I aim for, Dave?

How good would it be to have a tool that tells us:

what our Target Price should be at any given time

on any given time frame,

for any given market?

That would be super. But just hang on a tick...

The use of a trailing stop loss is something that I seldom use whilst trading the M5 time frame, and more recently the M1, because my target price is not too distant. But occasionally I do use it nonetheless. Usually when price is flying. Maybe to make a trade safe at a certain point usually on the rare forays onto a higher time frame. It can be a handy tool but I am certainly no expert in its use.

Our best friend the broker likes to use the phrase 'lock in profits' but the trailing stop can also be your enemy if not used correctly. Personally I like to move my stop manually as described in our Trade Management module because this way I am moving it in such a way as the candles tell me to, and not done automatically by a robot.

Just like your main stop loss it will likely get hit if placed too close. Make it too large and it will probably be less effective.

How good would it be to have a tool that tells us:

what our Trailing Stop should be at any given time

on any given time frame,

for any given market?

That would be fantastic. But just hang on a mo...

This section is for those who trade using Black Dog and particularly when using our channel. This also refers to our BDMax methods.

When using our channel, or BDMax, price leaves the channel and moves a certain distance before ALWAYS returning to the channel, it may then cross the channel and move a certain distance in the opposite direction before again returning to the channel. It always returns at some point. Let's remind ourselves of the fact:

It seems that price has an affinity with the channel and is always trying to get away from it, or return to it. We can use this to our advantage and have done for years. Therefore we need a guide on how far from the channel we can safely enter a trade before it has a mind to want to return.

How good would it be to have a tool that tells us:

what our Distance from Channel

should be at any given time

on any given time frame,

for any given market?

It would be very good indeed if we had a tool that could tell us these four points in an instant - and automatically.

Well - you'll be very pleased to hear that we have one.

This beautiful tool (ATR Display) will tell us everything we need to know regarding the four points mentioned above in assisting us in managing our trades, ie,

1. Stop Loss

2. Target Price

3. Trailing Stop

4. Distance from Channel

Everything is there. With the ATR Display I can be fairly confident that the next candle will be of a certain size (notwithstanding news events etc). The ATR Display is configurable to your particular preferences but here's a shot of my ATR at the top right of my chart:

You can see at a glance all the information that you need to manage your trades. The top value is the furthest distance I will enter a trade from the channel. The second and third are self-explanatory (stop loss and take profit size). I would also use the SL value as a trailing stop if I should use one, but rarely do. I would round up or down to the nearest whole number whatever those values say..

What could be simpler?

The ATR values constantly change as price fluctuates so you are seeing those values on your chart as they are NOW, or when the time comes to pull the trigger those are the values that I would use.

If the candles start to increase in size then so will the values of the ATR telling you that you will need a larger SL and TP size. Opposite for when the candles become smaller.

You could of course use any settings you want for the ATR but the point is that you now have a constructive way of managing your trades. You now KNOW what you are doing.

On every chart that I use for trading I have this handy-dandy tool positioned out of the way up in the top right hand corner and you can be sure that I couldn't do without it. Suggested Stops and Targets are there at a glance and I know that I am trading in harmony with my chosen market.

The question remains - do you want to trade in harmony with the market or just wing it? You could take a chance with pot luck.

Or, know all your levels in advance shown at the top of your screen before you even enter the trade, all done automatically. It is then just a matter of entering your values into your pending order.

We all know that trading can be a complicated business but here at Black Dog we like to simplify things as much as is humanly possible. What could be better? It takes only a second to read what your stops and targets should be. I generally round them up to the nearest whole number but if trading the higher time frames then maybe the nearest 5 or even 10.

It's all a matter of taste.

There should no longer be any guess-work of where your stop loss should be or how many pips you should be looking to make from any particular trade. The market itself has told you the figures so it is now up to you to trade constructively and become a far better trader.

Let me know what you think down below.

See you when the market opens ...

Dave