Large stop loss or small stop loss?

[masonlee]

Hi everybody here,

Anybody can point me to the right direction on how to set my stop loss appropriately?

Quite many of the time when i place a larger stop loss, the price hit my large stop loss and end up heavy losses.

But when i place a small stop loss, the price seem like tend to hitting the stop loss line very frequently and i have to repeatedly place multiple orders with the same small amount of stop loss and toward the same trend for a currency pair. With small stop loss, even i catch the right trend for a certain pair and earn significant amount of pips but overall i still having negative profit because i have lost quite many pips from many small stop loss trades during the starting of the trend.

Can you give me some guideline on how to set a appropriate stop loss?

Thanks and have a nice day!

 

[tech/a]

I've done a lot of testing on stop losses.

I found that 3-5% of purchase price was too small and you'll be stopped out prematurely often.
(I will and have traded these stop widths)
8-12% seems to be the sweet spot where you wont suffer from premature ejaculation or long periods of being trapped between your buy and stop price (Opportunity cost). Generally this occurs in stops wider than 15% of buy price.

If you position size correctly you wont suffer from larger losses just because you set a wider stop.
Look up ---Google "Fixed Fractional Position Sizing".

 

[CanOz]

Hi everybody here,

Anybody can point me to the right direction on how to set my stop loss appropriately?

Quite many of the time when i place a larger stop loss, the price hit my large stop loss and end up heavy losses.

But when i place a small stop loss, the price seem like tend to hitting the stop loss line very frequently and i have to repeatedly place multiple orders with the same small amount of stop loss and toward the same trend for a currency pair. With small stop loss, even i catch the right trend for a certain pair and earn significant amount of pips but overall i still having negative profit because i have lost quite many pips from many small stop loss trades during the starting of the trend.

Can you give me some guideline on how to set a appropriate stop loss?

Thanks and have a nice day!

Think of your stop loss differently and you will soon find the clues as to where you can place it. Think of it as the maximum amount of risk you are willing to accept for the position.

Your max risk should be associated with some calculations in relation to your risk capital, or the total amount in your account you are willing to risk.

To survive (look up risk of ruin) you should be risking only 1-2% of your account on each position.

So now with that in mind you need to determine where, based on typical range given the time frame, is a safe place to place your stop to avoid the noise yet manage that risk within your set limits.
Most people trading FX are trading times frames that are too short, therefore getting stopped out with the normal noise.

These days with mini and micro lots you should be able to manage your risk quite well to avoid getting shaken out, yet accept a risk well within your survival range.

Any questions, just ask.

 

[Bort]

What metric do you use to calculate what is the normal range in the timeframe of each market you are considering? If you consider what you believe is a 'normal' deviation from you mean or 'right trend' you could probably answer the stop question.

Average true range. Standard deviation. Just two ways.

 

[Gringotts Bank]

Hi everybody here,

Anybody can point me to the right direction on how to set my stop loss appropriately?

Quite many of the time when i place a larger stop loss, the price hit my large stop loss and end up heavy losses.

But when i place a small stop loss, the price seem like tend to hitting the stop loss line very frequently and i have to repeatedly place multiple orders with the same small amount of stop loss and toward the same trend for a currency pair. With small stop loss, even i catch the right trend for a certain pair and earn significant amount of pips but overall i still having negative profit because i have lost quite many pips from many small stop loss trades during the starting of the trend.

Can you give me some guideline on how to set a appropriate stop loss?

Thanks and have a nice day!

Don't always think about stops in terms of percentage or point value. As a swing trader you will generally do better with a time stop. With momentum, something like a parabolic or an ATR stop will work better.

Try to look at R:R with respect to the preceding price action, rather than having fixed $ or % stops. Also consider the current volatility and how this makes a stop more or less likely to be taken out prematurely.

 

[Boggo]

Hi everybody here,

Anybody can point me to the right direction on how to set my stop loss appropriately?

Quite many of the time when i place a larger stop loss, the price hit my large stop loss and end up heavy losses.

But when i place a small stop loss, the price seem like tend to hitting the stop loss line very frequently and i have to repeatedly place multiple orders with the same small amount of stop loss and toward the same trend for a currency pair. With small stop loss, even i catch the right trend for a certain pair and earn significant amount of pips but overall i still having negative profit because i have lost quite many pips from many small stop loss trades during the starting of the trend.

Can you give me some guideline on how to set a appropriate stop loss?

Thanks and have a nice day!

Practical example below on two charts from tonight. Fixed amount at risk on each, stopped out of one and no harm done, other was a winner.
Overall an each way bet of one long and one short. Result was one loss and one win ending in profit because the potential loss was a control amount.
(had they gone the opposite way it could have been a better outcome)

I've done a lot of testing on stop losses.

I found that 3-5% of purchase price was too small and you'll be stopped out prematurely often.
(I will and have traded these stop widths)
8-12% seems to be the sweet spot where you wont suffer from premature ejaculation or long periods of being trapped between your buy and stop price (Opportunity cost). Generally this occurs in stops wider than 15% of buy price.

If you position size correctly you wont suffer from larger losses just because you set a wider stop.
Look up ---Google "Fixed Fractional Position Sizing".

Exactly, simple concept that works.

Don't always think about stops in terms of percentage or point value. As a swing trader you will generally do better with a time stop. With momentum, something like a parabolic or an ATR stop will work better.

Try to look at R:R with respect to the preceding price action, rather than having fixed $ or % stops. Also consider the current volatility and how this makes a stop more or less likely to be taken out prematurely.

I am looking forward to you showing some application examples of the highlighted bit.

(click to expand)

 

[masonlee]

Thanks for the comments everybody!

I've done a lot of testing on stop losses.

I found that 3-5% of purchase price was too small and you'll be stopped out prematurely often.
(I will and have traded these stop widths)
8-12% seems to be the sweet spot where you wont suffer from premature ejaculation or long periods of being trapped between your buy and stop price (Opportunity cost). Generally this occurs in stops wider than 15% of buy price.

If you position size correctly you wont suffer from larger losses just because you set a wider stop.
Look up ---Google "Fixed Fractional Position Sizing".

So, may i know what time frame you did your testing? Usually, i trade in 30 minutes time frame, can this percentage applied on 30 minutes charts?

Think of your stop loss differently and you will soon find the clues as to where you can place it. Think of it as the maximum amount of risk you are willing to accept for the position.

Your max risk should be associated with some calculations in relation to your risk capital, or the total amount in your account you are willing to risk.

To survive (look up risk of ruin) you should be risking only 1-2% of your account on each position.

So now with that in mind you need to determine where, based on typical range given the time frame, is a safe place to place your stop to avoid the noise yet manage that risk within your set limits.
Most people trading FX are trading times frames that are too short, therefore getting stopped out with the normal noise.

These days with mini and micro lots you should be able to manage your risk quite well to avoid getting shaken out, yet accept a risk well within your survival range.

Any questions, just ask.

If my account is low on deposit and i calculate that 2% stop loss is actually very small, what should i do?

Practical example below on two charts from tonight. Fixed amount at risk on each, stopped out of one and no harm done, other was a winner.
Overall an each way bet of one long and one short. Result was one loss and one win ending in profit because the potential loss was a control amount.
(had they gone the opposite way it could have been a better outcome)

Exactly, simple concept that works.

I am looking forward to you showing some application examples of the highlighted bit.

(click to expand)

Look like it is a good idea.
May i know what reasons that lead you to use a stop loss risk of around 180 USD?

 

[tech/a]

Thanks for the comments everybody!


So, may i know what time frame you did your testing? Usually, i trade in 30 minutes time frame, can this percentage applied on 30 minutes charts?

Daily and stock Charts.
Just noticed your trading Forex so cant say its applicable.

If my account is low on deposit and i calculate that 2% stop loss is actually very small, what should i do?

Your trading a leveraged instrument.
I think you need to be having a major re think here.

2% is money at risk
Not your trading account size.

 

[Boggo]

I should have probably explained that the $ figure is 2% of the acc size.
If you look at the top right of the chart it shows the data that the software is using, in this case I have used $10k AUD which the software then recalculates to the applicable currency for the chart being used which in this case is USD.
The $ value at risk is therefore 2% of the USD calculated account size.

Hope this helps with the basic concept.

 

[CanOz]

If my account is low on deposit and i calculate that 2% stop loss is actually very small, what should i do?

Add more capital or trade a smaller size contract/lot. If you are trading 100k lots then go to 50k or 30k or less.

The 2% rule is a survival tactic. You want to survive so you can give your edge (statistically proven edge) a chance to work.

 

[>Apocalypto<]

some VG replies in this thread.

For me off the daily chart... I go just above the previous last high or low... this distance tells me if i meet my 3% of acc and sets my position size accordingly.

 

[masonlee]

Appreciate the explanations, all are very helpful.

 

[AussieMatt]

As others have mentioned, the pip size of the SL is really dependent on the situation, where s/r falls and ensure you are risking a fixed percentage each time irrelevant of SL pip range. A good way to think about it is at what point do you not want to see price get to? eg if price gets to point A it invalidates my whole setup, and then what % of my account am I comfortable to lose on this setup? this will give you your line in the sand and you lot size.

 

[masonlee]

Thanks for the good advice from AussieMatt.

I have another question, if in certain condition my SL need to be slightly widen in order to match with the nearest support and resistance level. For the purpose of maintaining the same risk-to-reward ratio is it appropriate to widen my TP target as well?

 

[AussieMatt]

Thanks for the good advice from AussieMatt.

I have another question, if in certain condition my SL need to be slightly widen in order to match with the nearest support and resistance level. For the purpose of maintaining the same risk-to-reward ratio is it appropriate to widen my TP target as well?

It really depends on your trading plan/strategy. do you have one? I would start there..

I personally avoid targeting a specific risk to reward ratio on every trade, rather focus on reducing risk as soon as logical to do so, whilst keeping my trade in tack.

My decision making when putting on a trade would be..

Does this fit my trade plan/criteria? (if you do not have one get/create one first or you will be lost very quickly)
where don't I want to see price get to if I trade the setup? (based on your trade plan, this will set your SL)
what am I risking on this? (eg 1%, I started at 0.5% per trade and is a better starting point IMO)
calculate lot size/position size (depending on your instrument/market)
Where is price likely to find trouble (again support/ resistance ahead)
What will I do at that point? take profit, move stop to break even,...

I would do some research on position sizing, money management and basic support resistance as well as building a trade plan. I am not saying it is wrong to target a specific risk/reward every trade but there are many ways to skin a cat.. a high win rate with an average win of 1R will still make you profitable, work out what you are comfortable with then build your plan around that and refine, refine, refine.

 

[AverageJoe]

As a swing trader I only find my trades at the resistance or support level on the time frame I am comfortable with. So if I buy around the support, I don't need a huge pip stop to know I am wrong and ditto resistance. I have known people use Fibonacci levels to place their entry that has confluence with what ever they are measuring it against and conversely place their stops using the same levels depending on the direction of trade.

I have played with ATR stops but find them too arbitrary coz backtesting an optimal number parameter is just good for the history and not the future.