I would love some advice from you experienced traders. So many times I put in a stop loss and at some point the market will have a brief spike, the stop loss is triggered, I lose a bunch of money then the market goes back the other direction. I've lost more money on this than bad trades. I would greatly appreciate advice on how to properly set a stop loss so I don't experience so many losses.
Thanks in advance!
Minneapolis DRS2 18:50:05 GMT - 12/03/2011
When setting stop losses, it helps to keep several things in mind:
1. How much you're willing to lose (obviously). If you've lost too much money, then it's time to get out of the trade. How much is too much is up to you, but most references would say between 1-3% of your capital.
2. Does the trade "meet" your assumptions? For example, let's assume that price has bottomed on some imaginary support line, so you decide to buy. If price then drops below support and doesn't immediately bounce back up, then the trade no longer meets your assumptions. It's always a judgement call in this situation, but oftentimes it's best to exit and take the loss. The trade won't get better, so take your lumps and get out before the loss gets worse.
3. One thing to remember is that the market is "rigged" (for want of a better word to use) to trip stop loss orders. This provides extra profit for those who are on the opposite side of the trade, plus it provides a better entry price for those entering the trade. If you take the scenario from #2 for example, it's potentially quite lucrative for the sellers to drive price below support. It then trips up the stops, cascading price lower and providing better profit. On the opposite side, the lower price provides a better entry point for the buyer.
So when entering a trade, keep in mind where the possible stops are. Sometimes, I'll place several small trades at different entry points instead of one large one. That way, if price goes in the wrong direction, I'll get multiple chances to "get it right" before I have to exit the trade and take a loss.
GVI Forex JAy 16:09:02 GMT - 12/04/2011
I have written about how I use stops on numerous occasions and it is worth repeating with an example. While most traders seem to place a stop based on how much he/she is willing to lose, I look at it as a stop should be at a level THAT HAS A MEANING FOR YOU AND THE WAY YOU LOOK AT THE MARKET. It should be at a level that tells you your trade idea is not working as planned and that it may be wrong but if at a level that holds, it keeps your trade alive and gives your plan a chance to work. It can be a tight stop or a wide stop as long as it has a meaning and not is based on the # of pips you are willing to lose.
One caveat is the markets are a lot more volatile than they used to be and algos seem to be a factor that push short-term moves farther than seem justified (such as on a news headline) but this does not alter my view that a stop with a meaning has a better chance of keeping you in your trade than one based on the # of pips you are willing to lose.
It is always easier in hindsight to cite an example but in this case I am comfortable doing so as I pointed out 1.3568 a key chart point on Friday before the US jobs report was released. As can be seen from the daily chart the high following Friday's US jobs report was 1.3548 and if your stop was above 1.3568, a eurusd short above 1.35 (if that was your view after the data) would have kept you in the trade if that was your stop. Others could have used 1.3614, which was even more on charts although 1.3568 was important as well as it was an intermediate high and lower high.
If the stop is too far away and you do not want to risk that much, then either do not go for the trade or adjust your leverage down to allow you to risk the same amount of $ for your trade. In an ideal world stops would always line up to give you the perfect risk/reward but this is not always possible. However, when an "identifiable" stop that has (and I emphasize) a meaning to you (not necessarily to me or anyone else) lines up with your trade idea, you have a situation where you can feel comfortable with your risk and a level that will give your trade a chance to work. Feel free to comment or ask questions as the way I see it, stops hold the key to trading.
GVI Forex JAy 19:23:29 GMT - 12/05/2011
BB, look at the 5 minute chart and make note of the obvious stops levels -- 1.3485 on top and 1.3445 on the downside.
Stops can also be stop entries, which in this case 1.3445 would have been a good one (i.e. sell entry stop) but that is with hindsight and depended on your view. Of course, no one could have anticipated the S&P news but point is this chart showed some obvious stops levels.
GVI Forex JAy 22:39:10 GMT - 12/05/2011
And using the 4 hour chart shows the trendline broken at 1.3435, which could either be a stop level (tells you a long is wr5ong) or a stop entry, againd epending on your view.
I like to keep it simple and use indicators, such as a trendline like this, as it is one many will use and you can anticipate a reaction if it holds or is broken. This is why I prefer to look at techniucal indicators that are widely used rather than using something proprietary trying to outguess the market. .
Bulverde BB 00:27:35 GMT - 12/06/2011
Thanks for all the great feedback! I really like this Global View website!
I only wish my losses from stop losses were 1-2%. But I've had losses as much as 10-20% in some cases (thankfully not all). And in those big loss cases, I was correct about the market direction, but there were big spikes that caused short term moves in the opposite direction, then the market continued in the direction I expected.
Jay's explanation of the support and resistence levels gives me the impression that I need to zoom out more to see the longer term picture to establish those support and resistance levels. I believe I'm looking too short term.
Thankfully, I'm still using a small amount of capital and buying in minilots while I learn how this works. As on eager to learn, any additional imput is very much appreciated!
GVI Forex Jay 00:45:07 GMT - 12/06/2011
BB, as I mentioned to you when we spoke, it is important to look at longer term time frames so you have a perspective of the overall trend (pictuare) and what it would take to change it. However, you need to decide what time frame you want to focus on.
In any case and I cannot emphasise this strong enough, look for levels that have a meaning to you and your analysis when setting your stop.
For me, I like trendlines (drawn my way) and this is a big part of my trading analysis as I put a lot of effort into finding the strong side of the market to trade.
Hope this helps.
Minneapolis DRS2 00:58:09 GMT - 12/06/2011
Money management is a very important part of your trading system. Some traders say it is the most important part.
Any trade you make should risk 1-3% of your capital AT MOST. If you blow 10-20% on a single trade, then mathematically speaking you are well on your way to blowing up your account. You need to scale back your trades.
Don't be afraid to trade in smaller sizes. The trading platform I use lets me set the size of lots. If I want to, I can trade in microlots (1/10th of a minilot). If your trading platform will let you adjust the lot size and/or leverage, you should consider doing the same.
You are absolutely right about looking at the big picture. On my system, I have four charts -- monthly, daily, hourly, and 15 minute. The higher level charts help to determine overall direction, and the lower level charts show immediate price action. Other people use 4-hour charts or weekly charts -- which ones you use are a matter of personal preference.
Since you mention being taken out by spikes, I'll also mention that you should be aware of what news events might happen that day. The current forex trading environment is highly news-driven. Traders literally sit around watching news headlines for items of interest, and buy or sell based on those headlines. As you're learning, you might want to pay attention to the news calendar function if your trading platform has one, or you can watch the economic calendar from this website's Tools menu. Also, watch for news of upcoming economic events like NFP announcements, FOMC meetings, etc.
If after learning a bit you find yourself accustomed to trading by news headlines, you might consider subscribing to a service. Jay often promotes the "Trade The News" service -- you can ask him for details. It's a commercial offering, and somewhat pricey for the beginning trader. Once your trading is more established, however, it is a really good deal for the features it offers.
GVI Forex Jay 01:10:49 GMT - 12/06/2011
I have spoken with BB and one issue is how to interpret the news and that only comes through experience. A lot of what experienced traders take for granted is hard to grasp for new traders. I also agree 100% about money management .
This is why we encourage asking questions and not to be intimated to do so as we all started as newbies.
We are working on a new feature for this and contact me if you would like details.
Mtl JP 01:31:42 GMT - 12/06/2011
I am with the "Some traders" focuss on risk (and its control) as the most important aspect of trading.
The reason is simple. Example:
When you start with a 100 bux and lose 25, you now have a 75 bux to play with.
To make it back to the original 100 bux from the 75 bux base you now need to see a net 33% gain sucess.
IF you lose 50 bux of your original 100 bucks
1) you ll have had probably abdicated control of your destiny to your dealer.
b) to climb from the 50 buck level to the original $100 you need to see a 100% gain. Something that puts you in the revered trader category, i.e. rare breed. Or, worse for you and to the glee of the dealer, into high risk trading psychology of double or nothing type trades.
High leverage (gearing) works equally fast in both directions. To survive in this leveraged game, one must pay attention to one's margin first and foremost, big picture notwithstanding.
When a bank pushes a product to the market, it does not do it because it has its would-be customers interest at heart. It does it because the banks has calculated its profit first.
So ask yourself: why is the bank pushing high leverage's benefits in its advertising ? The answer is because its plan is to pluck you.
Bulverde BB 05:14:34 GMT - 12/06/2011
Thanks for all rhetorically good pointers. I have cut the size of my trades in half. It does tend to have more of a calming effect! :-)
Perhaps important a little dense Jay but I'm a little fuzzy on your last comment. Perhaps I can check in with you tomorrow.
San Antonio BB 20:54:27 GMT - 12/06/2011
Sorry, I was using my droid last night for my last response. It was supposed to say "Thanks for all the good pointers" Sheesh!!!
GVI Forex Jay 23:01:01 GMT - 12/06/2011
I am surprised this discussion did not attract more participants as it is a topic worth discussing. I encourage those hesitant to post to do so.
Mtl JP 23:07:26 GMT - 12/06/2011
- do you add to a losing trade in hopes of dilluting, via averaging, the loser tarde and hope to accelerate the odds of getting out of it without taking a hit ?
- do you move your stop loss if priceaction starts to come close to it ?
why y/n ?
Bulverde BB 02:09:43 GMT - 12/07/2011
Sorry for not being very active in this conversation, but my ISP had a major crash! Thankfully, I didn't have a trade going at the time!
To MTL: Rather than adding to a losing trade I will trade an equal amount in the opposite direction on that trade. In doing so I expect to gain an amount to pair off the losses on the losing trade until it comes back the right direction. Of course that's assuming that I still expect the trade to go in the direction I expected, otherwise I dump the trade and lick my wounds, such as when the Euro popped over 1.40 not long ago. Since I am dealing with a small amount of money, this also prevents a margin call. I'm sure some are saying, man, this guys is seriously stupid, but it has helped me reduce losses and in some cases actually make a little money.
I'm sure I'm all screwed up in my logic, but I wonder if it's better to put in an order in for the opposite trade rather than putting in a stop loss? At least if the market spikes, the opposite trade makes money to pair off the losses on the other trade and prevents a margin call. It could be a strategy that hs been tried and failed, but we are in unusual times. Perhaps other strategies could be considered. Just saying....
Minneapolis DRS2 02:37:27 GMT - 12/07/2011
At the end of the day, what you are doing is trading in both directions, hoping to make a profit on one and maybe even both sides of the trade. There's nothing inherently wrong with doing this -- I do it all the time in my own trading. Long-term trades, short-term trades, longs, shorts, you name it.
To make it work, you need three things: Terrific organization, an excellent ability to not lose your head in fear, and the willingness to cut off loser trades rather than hedging them. Much of my trade management is not done on the trading platform, but on an Excel spreadsheet that I keep running all the time. All of my buys and sells are recorded, and I watch where the market goes. If price goes up, I'll buy. If price goes down, I'll sell. Buy and sell at the right times with respect to market activity, and you can make decent money.
Keep in mind that this is not always easy to do. I didn't read where you were located, but hedge trades were discontinued on US-based trading platforms in favor of a FIFO (first-in, first-out) system. Simply put, the first trade opened is the first trade closed, and so on. With a FIFO system, you no longer have active trades in both directions like you might have had in the past -- if you sell a currency pair, for example, then your earliest buy will be closed if you have one. This places the responsibility on you to watch your own trades, rather than depending on the trading platform to do so.
San Antonio BB 03:49:19 GMT - 12/07/2011
Well I'm glad to hear I'm not the only one thinking with this strategy. I normally won't do an opposite direction trade unless the price pushes through a short term support or resistence level, dependiing on the news moving the market, and depending on the long term direction of the market.
What I'm wondering, and please consider I am new to this game, would it not be better to place a buy or sell stop rather than a stop loss? Jay's probably ballistic right now! :-) Rather than taking hits on a trade, to limit the loss, getting into a trade going the direction of the currency pair at that time. That way you have a choice of closing the losing trade with a pre-determined loss or keeping the trade if the market is expected to go back in the originally expected direction?
BTW, I changed my city to the one nearest to me which is San Antonio, Texas.
Minneapolis DRS2 04:43:46 GMT - 12/07/2011
Buy and sell stops can be very useful at times. However, you must be cautious in their application. There are two caveats that I can think of right away, and I'm sure others will have more:
1. At news events, it is commonplace for stops to be cleared on both sides. For example, on many NFP days, you'll see price jump 50 pips, then drop 100 pips, and finally bounce back up 50 pips. Price will end up right back where it started. Many traders (myself included) have jumped in looking for a trend, only to get whipsawed back to the other side. In fact, this year's activity in EUR/USD has basically been a giant set of whipsaws. (Why that is so is a discussion for another time!)
2. I'm not sure it's such a big deal for the smaller retail traders, but at a certain level price slippage comes into play. If you have a stop buy at price X, for example, it may not be filled at that price when it is finally triggered. It may in fact be filled at price X plus several pips. Stop sells work the same way.
San Antonio BB 15:00:03 GMT - 12/07/2011
Yup, done been burned by that one. When news comes out, I normally wait for the spike to peak, then I'll get in that currency as it retraces. Where I've really been burned is in the wee hours of the morning.
My broker doesn't use a purchase desk (?), so the trades go through rather quickly, a little slower in heavy volume. This Friday there is an upgrade to the MT4 trading platform that is supposed to further improve the time it takes to place the order. But I certainly get your drift. Thanks for all the good imformation!
Bangalore05:41:10 GMT - 07/09/2012
Trading in Forex is only successful if you lose the fear to lose. This is what I found in last many encounters with difficult situations in Trading scenario. Actually I wrote a nice article about this matter- under heading :"forex trading a fear to lose" You can check this article at- http://www.earnfreedollars.com/blog/2012/05/forex-trading-a-fear-to-lose/
I do not know much about human psychology, but I am dead sure that people will fear to lose things in life which restrain them from success. I have my own experiences in this matter.
muntinlupa10:00:47 GMT - 09/04/2012
A profitable trader's account will either contain lots of small losses but plenty of bigger gains which more than compensate for the losses, or they will have similar sized gains as the stop losses but more of them so they are in profit overall.
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