How Do I Choose a Stop Loss? - How Many Pips Should I Set My Stop Loss? - How to Use Stop Loss Orders

How to select you stop loss level the target stop loss should be based on various strategies depending on your type of forex trading method.

The 3 techniques of selecting stop loss levels are:

Strategies & Techniques of Setting Stop Loss Orders In Forex

Forex traders using a Forex system must have mathematical calculations that reveal where the order must be placed.

A trader can also place a stop loss order according to the indicators used to set these orders. Certain indicators use mathematical equations to calculate where the stoploss order should be set so as to provide an optimal exit point. These technical indicators can be used as the basis for setting these orders.

Forex traders also place these orders according to a predetermined risk to reward ratio. This method of setting is dependent upon certain mathematical equations. For examples a ratio of 50 pips stop-loss can be used by a trader if the trade has potential to make 100 pips in profit: this is a risk:reward ratio of 2:1

Other traders just use a predetermined percentage of their total forex trading account balance.

To set a stop loss it is better to use one of the following methods:

1. Percent of Forex Trading account balance

This stop loss setting method is based on percent of account balance that the trader is willing to risk.

If a trader is willing to risk 2% of account balance then the trader determines how far he will set the stop loss order level based on the trade size which he has bought or sold.

Example:

If a trader has a $10,000 trading account & is willing to risk 2 %

• If the trader buys 1 mini contract

  1 pip = $1

  Then setting at 2 %

  2% is $ 200

  200 /1 = 200 pips

  Stop loss = 200 pips

• If the trader buys 2 contracts

  1 pip = $2

  Then setting at 2 %

  2% is $ 200

  200 /2 = 100 pips

  Stop loss = 100 pips

• If the trader buys 4 contracts

  1 pip = $4

  Then setting at 2 %

  2% is $ 200

  200 /4 = 50 pips

  Stop loss = 50 pips

2. Setting Stop Loss Orders using Support & Resistance Areas

Another way of setting stop loss orders is to use supports and resistance levels, on the trading charts.

Given that stoploss orders tend to congregate at key points, when one of these levels is touched by price, other trading orders are set off. Stop loss orders tend to accumulate just above or below the resistance or support levels, respectively.

A resistance or a support area should act like a barrier for price movement, this is why they are used to set stop losses, if this barrier is broken the price movement can go toward the opposite direction of the original currency trade, but if this barriers (support & resistance levels) are not broken the price will continue heading in intended direction.

Stop Loss Level Setting using Resistance Level

Setting stop loss order above resistance level

Stop Loss Level using Support Level

Setting stop loss order below the Support Level

3. Forex Trend Lines

A Forex trend line can be used to set stop losses where the stop loss order is set just below the trend line. As long as the trend line holds the trader will be able to continue making profits while at the same time set this stop-loss order which will lock his profit once the trend line is broken.

Setting stop loss order below trendline

Examples of where to set this stop loss order using Forex trend lines.