RE: CHARTS -T LINE TIPS11 Oct 2016 09:17
Trendsignal Trading Tip: Where to set your stop loss?
This is a really important topic. In fact, where you place your stop loss is probably more important than your entry. The exit is the most important thing because it sets how much money you make or lose on the trade.
The irony is, most beginner traders spend much more time calculating when to get in, and leave the stop loss as an afterthought.
I am going to break this topic down over a few weeks, but these are important things to consider:
1) Check for recent support or resistance
2) Give it room to breathe
3) Should you trail a stop or move it to break even?
4) Stops are too wide for my broker
I am going to start with “Stops are too wide for my brokerâ€. The reason being is that if you are with the wrong broker, you may feel unable to improve your stop loss method.
There is a common misconception that the stop should be nice and tight to reduce risk. However, if your stop is in the wrong place, you are increasing your risk, regardless of whether it is tight or not. Ultimately, your stop needs to be in the right place to allow the trade room to develop. This is of course something we teach all our traders, but obviously, the higher the timeframe, the wider the stop loss tends to be.
If you are trading from a Daily chart, it may be correct to have a stop loss of over 300 points! That may sound mad, but if that’s the right place, then that’s where it needs to be.
The reason why your broker choice is important is if you need a 300 point stop, and your broker doesn’t allow you to stake less than £1 per point, then there could be a problem. The problem is for traders who prefer to risk less than £300 on a trade, which is certainly the case for most beginner traders.
So, let’s assume you don’t want to risk more than £100 on a trade. Your strategy has identified a trade needing a 300 point stop loss, and you cannot stake less than £1 per point with your current spread betting / CFD broker, in other words, necessitating £300 risk, way in excess of your limit. One of 4 things will now happen:
You decide to avoid the trade. Of course Sod’s Law will prevail and it will be a winner that you have missed. Annoying.
You decide to take the trade anyway, even with the bigger risk. Again, Sod’s Law may prevail and you take a very big hit on your account of £300. You need to play a lot of catch up to make that back!
You wait for a pull back, to improve the situation, and buy at a cheaper price. The problem with this is that in doing so, you negatively affect your success rate (to be explained in a future trading tip). Statistically, your trade is now far less likely to be a winner, again not good.
Finally, you decide to place the trade anyway but place the stop much tighter than required, just 100 points away, to ensure you don’t risk too much money on it. But, like so many perfectly good trades, it pulls back first, hitting your wrong stop loss before rallying to target. Massively frustrating!!
All the scenarios above are bad and completely unnecessary.
So, today’s trading tip: Trade with a broker that allows you to get the business done, that you want to get done! There is choice out there, and you need to be able to trade the way you want to trade. So, if you need to trade with a broker that allows you to stake less than £1 per point, then do so! Simple really.
Here’s a couple you may want to consider. These are not necessarily recommendations, but something to think about:
ETX Capital. Trade various markets from 50p per point – more info.
Finspreads Beginner Account. Wider FX spreads, but can trade from 10p per point – more info.
There is nothing glamorous about trading big size. What’s important is that you get it right!
To get more info go on Trend signal website. Remember don't pay for anything.
Good luck investing trading always
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