Where To Place Your Stop Loss?

Struggling to find the correct stop loss placement?

Always getting stopped out?

Unsure where to take profits?

Read on…

4 Ways to manage your trade AND be in harmony with the market

I reckon you’ve heard it many 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?”  This indicates a trader who really doesn’t know what he is doing, and Mother Forex will take her (huge) cut of his account eventually.

One stop loss size does not fit all

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. But on some days those zigs and zags grow in size and cover many more pips – volatility. Use the same size stop loss and … bye-bye.Where To Set Your Stop Loss

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 market, then you are managing the trade correctly. More shortly …

The Lure of Forex

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..!!

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

Where To Set Your Stop LossNow, 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. You MUST have a plan. A plan that covers all aspects of your trading. Entering trades willy-nilly isn’t trading – it’s gambling, and we know what the outcome of that will be…

There are three parts to a trade – the opening, during, and the closing.

In the initial stages of the trade it may do one of three things – reverse on you, flatline, 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 do keep our eye on many factors.

Before we go on to managing our trades (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 comes to us. We NEVER go chasing the market. No sir..!!

So, here are the four main points that we consider to be extremely important when considering entering the market…

1. Stop Loss

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

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 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 for 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 thing by using a tool that we’ll 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 by doing 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.Where To Set Your Stop Loss

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 the market with a relatively small loss and not wake up one morning staring at a huge loss of biblical proportions. The stop loss will do that for you – it will protect your account.

The idea is to MANAGE the trade.

In all my time of trading currencies, commodities, indices, stocks, etc., the question fired at me the most has always been, ‘Where do you place your stop loss?’ closely followed by, ‘Where do you exit the trade?’

You do use a stop loss, right?

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 so it is best to be prepared.

Any good trader will set his stop loss immediately he enters the trade 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 and, indeed it should be uppermost in your mind at the time. It is certainly my first action.

So now that we know 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?

Great, but just hang on a second…Where To Set Your Stop Loss

2. Target Price

Having a target price is fine if it is tune with reality, but what should you aim for? Trading the M5 time frame and having a 500 pip target is a little on the optimistic side. Similarly, just aiming for the first number to come into your head is, again, not trading but gambling.

It’s usually a good idea to aim for what the market is offering. Best of all, it will tell you.

Trading with clenched bum muscles and clumps of hair scattered on the floor around your office chair is not a good sign that things are going smoothly. Take those profits and run. It doesn’t matter if the market moves further in your favour. Take your profit and look for the next trade. Now you are trading well.

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?

Super, but just hang on a tick…

3. Trailing Stop Loss

The use of a Trailing Stop is something that I seldom use whilst trading the M5 time frame because my target price is not too distant. But I do use it occasionally nonetheless. Maybe to make a trade safe at a certain point usually on the rare forays onto a higher time frame. It can be handy.

Our best friend the broker likes to use the phrase ‘lock in profits’  but the Trailing Stop can be your enemy if not used correctly. Just like the main Stop Loss, if it is too close it will likely get hit, 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?

Fantastic, but just hang on a mo…

4. Distance From Channel

This section refers to those who trade using Black Dog and particularly when using our channel.

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.

The point being made here is that price ALWAYS returns to the channel. Let’s just remind ourselves of this fact.Where To Set Your Stop Loss

We want to enter the trade when price is leaving the channel and NOT when it is returning. So we want to enter the trade not too far from the channel.

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 our trade.

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, we have one, you’ll be pleased to hear.

Enter – the ATR

This beautiful tool is the ATR (Average True Range).

Now let’s say that if I take an average of the total range of each of the last fourteen bars or candles, then I have a good idea of how the market is moving. I can be fairly confident that the next candle will be of a certain size (notwithstanding news events etc.).

If I then multiply this average by, say, 1.5 then the chances of that candle NOT moving that far are pretty good. So I can set my stop at that value which will give the market some breathing room, elbow room, room to manoeuvre, call it what you like. I can set my stop loss accordingly.

Here’s a shot of the ATR at the top right of my chart:

Where To Set Your Stop Loss

You can see at a glance all the information that you need to set up your pending orders:

ATR is using 14 candles and the average is 14.3 pips

SL (Stop Loss) is multiplied by 1.5 and is 21.5 pips which I would round up to 22

TP (Target Price) is multiplied by 2.0 and is 28.6 pips. I would probably shoot for 30.

I would use a Trailing Stop of 22 pips

But I would enter a trade only if it is less than 28 pips or so from the channel.

All this info can be seen at a glance. Let’s just take a closer look at the ATR:

Where To Set Your Stop Loss

I could use any number of candles to arrive at this figure but I have found that fourteen suits my purposes for the M5 time frame. The multiplier could also be any number but again, 1.5 does the job for me in giving the trade the best chance but also keeping losses relatively small. The chances are that my stop will not get hit. It does occasionally but that is trading. I can take the loss because I have done my homework (or rather the tool has) and I take the loss on the chin, it is just a part of trading life. Move on and look for the next trade.

Now, if I multiply our ATR average by 2.0 then I now have my Target Price. Beautiful..!!

You could of course use any setting you wish for Stop Loss and Target Price. The point is that you now have a constructive way of trading. You KNOW what you are doing.

To recap: the beauty of this is that we have a tool that does this all automatically for you. It tells what the range of the last X amount of bars or candles is at this particular moment in time that you are considering making a trade (depending on how many bars or candles you want). The ATR values change as price changes on the chart.

If the candles start to increase in size, then so will the ATR value, telling you that you need a larger Stop Loss and Target Price. Opposite for when candles become smaller.

Now, once the trade starts to move into profit and I wish to activate the Trailing Stop feature, I simply use the Stop Loss value as the size for my Trailing Stop – how easy is that?

Similarly, I use the Target Price value as a limiter to indicate a safe distance from the channel to enter trades. Beautiful..!!

SL refers to Stop Loss size.

TP refers to Target Price or Take Profit.

We could set the TP to ATR X 3.0 if we wished, or any value that we are comfortable with.

On every chart I use, I have this very handy tool positioned out of the way in the top right-hand corner, I just couldn’t do without it. Suggested Stops and Targets are there at a glance and I know that I am trading in harmony with the markets.


The question remains – do you want to trade in harmony with your chosen market or just wing it? You could take a chance with pot luck.Where To Set Your Stop Loss

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 possible. What could be better? It takes only a second to read what your Stops and Targets, etc, should be. I generally round them up to the next whole number. But if trading a higher time frame then I would round up to the next 5 or 10.

It’s all a matter of taste.

There should be no more guessing where your stop loss should be or how many pips you should be making 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.

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