Stop Loss

Place the stop loss in a trade position Forex

As we already know, the stop loss will fall within the risk management and money management, aspects which we must understand very well to get to be profitable in the long term.

But where should you place the Stop Loss?

It should be placed where we think that the price will never come. That’s why if it comes, we take our stop. It means that in addition to being the stop loss tool to protect the capital, it is also a confirmation of an error based on the statistics. We already know that in trading we will have a percentage of failed trades caused by signals that do not work out as expected.

For example, if these operating the rebound in a resistance (we assume a double top), the stop loss logic should be above that resistance (of the roof). Since your strategy was to operate toward the low after the bounce.

Why the stop should be above the roof? Because if the price rises above, is that there was a double roof. Remember that we saw in the technical analysis are not always followed the patterns of the figures.

The level to cut loss should not be random, on the contrary, must be based on the technical analysis. Some people do not know how to use it and that’s why they lose money constantly.

We show this example of a double roof with a chart so that it easier to understand:

This is what happened after. The figure was given as we had hoped, but had it not been so, we were covered with a stop above the high.

We will calculate the position size of this example to satisfy that the stop this well-placed (we assume a trader that invests 50% in one operation, while there is much, there are people who do it and what we will take as an example just to understand the theme of the placement of the stop), with the following data of a trading account:

Total Capital: u$s10.000

% of loss due to operation (capital, risky): 1%

% of capital in 1 single operation (capital invested): 50%

Place Stop Loss: To cut losses with this chart, the stop should be above the maximum (if it would just bounce off the same level, will be above that level).
The maximum is at u$s21,05 therefore we give a few cents of margin and place the stop at u$s21,20.

Input: we Assume that we place a sale order (as we are in short, towards the floor) limited near the close of the previous session, that is to say the last candle is green (or it could also be the maximum of the previous session) to u$s20,82 and that our order is executed.

Size of the operation: The account is u$s10.000 and arriesgaremos u$s100 (1% of the account). As the stop is in u$s21,20 and the input u$s20,82 the risk assumed is u$s0,38 per share sold. Therefore, to determine the size of the operation is to subtract first the commissions of the broker, both for input as for output(will u$s10 by way of example, depends on the broker). We would be u$s90. As we are going to risk u$s0,38 for each action, then we will be able to sell 236 actions. This calculation arises from making u$s90/ u$s0,38 = 236,84 and rounded down the result.

Then the maximum position will be u$s5003,20 as in the case of stop, we will have to buy them at that price, that is to say, we sold 236 shares u$s20,82 and bought a u$s21,20, leaving a loss of u$s89,68. But if the position is winning, assuming our target, u$s18,03 we have done the following: we’ve sold 236 shares u$s20,82 and buy, u$s18,03 that is to say, we sold or$s4913,52 and bought u$s4255,08 leaving us with gain, or$s658,44.

As you will notice, the risk is controlled, because in case of loss we have u$s89,68 (would be u$s90 remaining, but gives a few cents less because we round the number of shares) plus u$s 10 of the commissions.

This is the same as what we see in the following chart, calculated by TradingView. The red part is the stop, and the green of the target, as you can see it says stop 0,38 and in the green part QTY 236, which are the amount of actions.

We put u$s18,03 for be a possible support for the example but you could have put more or less, depending on how you operate.

So would be the graphic once a hill the bag and place the limit order to sell for the next day or before the opening of the next day.