How to Set a Proper Stop Loss in Forex

It’s time to learn How to Set a Proper Stop Loss in Forex.

Have you ever jumped out of a plane without a parachute? I doubt it- otherwise you wouldn’t be here to read this! That is what it is like to trade without knowing How to Set a Proper Stop Loss in Forex (okay, maybe a little less dramatic).

I have helped thousands of traders over the years, most of which have had the wrong outlook on how to set a proper stop loss. A stop loss is your parachute, it is your protection from danger within the markets. Let’s not forget that you must protect your captial first and foremost if you are to make it as a trader. If you do not have capital to trade, then you are no longer trading. Your stop loss is what will keep you in this for the long term, so it is time to learn how to set a proper stop loss in Forex.

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Most amateur traders think that your stop loss needs to be set based on your risk tolerance. The point where you say “mercy” and can no longer take the pain of the losing trade your in. I am here to tell you that couldn’t be more WRONG. Your stop loss should have absolutely nothing to do with how much you are willing to risk in a trade. How much you are willing to risk should be determined by your position size, not the amount you’re willing to risk.

The one and only thing that matters when you determine the location of your stop loss is that it invalidates your analysis. Don’t worry about how many pips you would lose or how much money you would risk- you determine that after your stop loss has been found. The most important thing to consider when you find the placement of your stop loss is “where would my analysis be wrong if this trade doesn’t go my way”. Let me get visual with you for a second to try and explain my point with a real life example.

How to Set a Proper Stop Loss in Forex: Example

Below you can see an example for a trade I took in September, 2018. I was playing a pullback trade looking to get a trend continuation on the higher time frame. The red box below shows where my stop loss was placed. Notice how it is above the prior swing high before falling to trigger me? That is the precise point where I no longer want to stay in this trade and believe my analysis to be invalid on this setup.

Now look at this picture below- price never went in my direction and just came right back to stop me out. It broke the trendline and the last structure high, which was the signal for me to say “okay, I was wrong- I want to save my money and live to trade another day”.

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How to Set a Proper Stop Loss in Forex: Summary

I can’t emphasize enough the fact that your stop loss has nothing to do with money, or even pips. Your stop loss placement is first determined, then you see how many pips it would be risking and then you determine the amount of money you are willing to risk on that exact setup. To learn more about determining how much to risk and how to calculate this, see this video on How to use a position size calculator.

There is a pretty rich guy, you may have heard of him, who has a quote that you must live by: “The first rule of investment is don’t lose money. And the second rule of investment is don’t forget the first rule. And that’s all the rules there are” Warren Buffett. One of the richest investors/ traders to ever live has dropped a nugget that you should hold on to and cherish forever.

Take the time to implement these simple concepts into your trading and I can assure you progress will be made. Managing risk is the key to trading, it is up to you to embrace it and have the discipline to follow it.

If you would like more education and guidance to learn how to do this, I have designed an entire course to teach you how to trade Forex. It will teach you everything you need to learn, from the ground up, while having my personal guidance all along the way. Click here to learn more and take our Full Online Forex Training Course.

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