Stop Loss Management

The initial setting of stop losses is critical to good trading.Tutorial Magnifying Glass There is never a truly right place to set them, though obviously some levels make more sense than others and much will depending on your profit objectives as well as your risk appetite. As a rule the greater your profit aspirations then the more ‘flex’ you should work into your stop loss management to allow for natural retracements.

Remember that when setting stop losses, the stop loss should be set where ‘the reason for being in the trade becomes invalid’, should price move back up or down through that level. For example if you are swing trading ‘long’ then the most obvious place for the stop loss would be just beneath the prior swing low on the time frame you are trading.

Getting to breakeven is the first step in the management stop losses. By doing so you are protecting your capital, which in turn must be the primary objective in all trading. No capital = no trading!

Thereafter, when trailing stop losses there a several ways to achieve this, some more judgment based and some more mechanical for those who trade better when using firm rules to guide their decision making.

Check out the video below for further explanation.

3 thoughts on Stop Loss Management

  1. Hi Nick,
    I have a question egarding the initial setting of stop losses. Say you are trading a pin bar, bouncing off a MA or trend line and the base of that bar is 500p, do you set your stop 1p lower or use a certain percentage, eg 1% = 495p?. Is it an “art” thing or a mechanical rule that you use?

    I love your website – it is a great resource. Many thanks.

    David

    1. David, to be honest i tend to go with 1p below in your example. The real take home message though is the importance of consistency.

      Clearly both approaches have their merits but ‘sods law’, if you mix and match you’ll pick the wrong approach one at the wrong time. I genuinely believe in trying to make your trading as mechanical as possible and for every decision type – remove ‘dangerous’ emotions wherever possible. Why do you think more and more trading is done by computers?!

      Nick

      1. Thanks for that Nick. I have quite a bit of experience of “sods law” and, as a consequence, am trying to hone down my strategy. Yes, consistency is everything, it seems.

        Thanks again
        David

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