How do you set your stop loss? TA and MM Considerations? | Forex Factory

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How do you set your stop loss? TA and MM Considerations?

  • #1
  • First Post: Jan 20, 2010 3:09am Jan 20, 2010 3:09am
It seems the key to successful trading is money management. Therefore I am trying to understand the best logic for where to set your stop losses.

In the past I have always searched for the ultimate entry point. However if I now find the best entry, my stop (determined by money management) may not necessary be the best technically.

What happens if entry is 100 pips above support (support being technically a good place for a stop), but your stop loss is only 30 pips?
  • #2
  • Jan 20, 2010 4:01am Jan 20, 2010 4:01am
Quoting dmuk
It seems the key to successful trading is money management. Therefore I am trying to understand the best logic for where to set your stop losses.

In the past I have always searched for the ultimate entry point. However if I now find the best entry, my stop (determined by money management) may not necessary be the best technically.

What happens if entry is 100 pips above support (support being technically a good place for a stop), but your stop loss is only 30 pips?
u can either use 100 pips support ( i really not recommend this unless u so sure..) or use candlestick (depending on ur TF) or u can use indi like MA as ur sl...

ps: may i know why u enter 100 pips above support not earlier than that? tq
  • #3
  • Jan 20, 2010 4:03am Jan 20, 2010 4:03am
sl and mm is for me connecting each other...both need to be in balance ...dunno bout others thou
  • #4
  • Jan 20, 2010 5:53am Jan 20, 2010 5:53am
If technical indicators say my stop loss should be 20% below my ideal long entry price. But my money management rules say I can only risk a 5% fall. What do I do?

I may be confusing things, but I wish to know how others set their stops prior to entering a trade. TA indicator, percentage...?
  • #5
  • Jan 20, 2010 7:48am Jan 20, 2010 7:48am
Quoting dmuk
If technical indicators say my stop loss should be 20% below my ideal long entry price. But my money management rules say I can only risk a 5% fall. What do I do?

I may be confusing things, but I wish to know how others set their stops prior to entering a trade. TA indicator, percentage...?
hi dmuk,
honestly i dont do percentage like what u just said..but what i do is i will calculate how many times i can trade before i totally blow up my account..

dunno if u can understand this becoz different ppl have different approach..for me it will be like this..Now assuming i have usd100 and each time i hit sl i will lose 2 dollars..so technically i can trade like 50 times before account blowup...

Then next i will make sure that each time i trade i will not lose more than 10 times..that will be the max losses for single trade..if it reach 10 or over...meaning something totally wrong with that system or in this case max losses per trade is usd20 dollars..(some might say that risk is too high) but i dont think so since i start with small number (remember use or deposit money that u think if u blow up acc u dont have problem/dont mind)

hope u understand
  • #6
  • Jan 20, 2010 8:21am Jan 20, 2010 8:21am
Quoting dmuk
If technical indicators say my stop loss should be 20% below my ideal long entry price. But my money management rules say I can only risk a 5% fall. What do I do?

I may be confusing things, but I wish to know how others set their stops prior to entering a trade. TA indicator, percentage...?

I think you are confusing things.

Once you have a possible entry then you have to decide where your SL should be placed. For most people this will be based on support and resistance levels although there are other ways to determine it. Actually S&R is the primary way to determine it, it is just that people have different ideas of what S&R is. For some it is a trendline, others it is an MA, others it is previous high/low etc.

Once you have your SL measured in pips from your entry point then you calculate the lots you will risk based on your MM strategy.

For example, assume you have a $50,000 account and always risk 2% which equates to $1000. Now you have an entry at 1.4750 and the SL you have identified is at 1.4835 then you have a 85 pip SL. That means that you are willing to risk $1000 over that 85 pips which equates to $11.47 per pip. Depending on the currency pair traded and your account currency this will equate to a particular lot size.

Again for ease, let's assume that it is EURUSD you are trading and that you account is denominated in USD. In this case you could trade 1.14 lots if your broker supports 2 decimal lot sizes or 1.1 if your broker only supports 1 decimal size.

In this manner your risk will stay constant at your predetermined size.

REMEMBER: the process is:

DETERMINE ENTRY
DETERMINE SL
CALCULATE LOTSIZE
ENTER
MANAGE
  • #7
  • Jan 21, 2010 1:30am Jan 21, 2010 1:30am
flyer415 - Thanks for the explanation.

As I understand it...

Effectively you select your entry point and stop loss before doing any money management calculations.

You then "spread" your risk across lot sizes. The larger your stop, the less lots you hold; and vice versa. You may end up holding a small number of lots, but have a wider stop loss and avoid being stopped out prematurely.
  • #8
  • Jan 21, 2010 10:54am Jan 21, 2010 10:54am
Quoting dmuk
flyer415 - Thanks for the explanation.

As I understand it...

Effectively you select your entry point and stop loss before doing any money management calculations.

You then "spread" your risk across lot sizes. The larger your stop, the less lots you hold; and vice versa. You may end up holding a small number of lots, but have a wider stop loss and avoid being stopped out prematurely.
I agree with flyer415.

Set your stoploss according to TA-based criteria, i.e. the exit point is where subsequent price movement would prove your strategy 'wrong'. Then size your position according to risk.

The following post might be a helpful reference, in terms of understanding how the calculations work.
  • #9
  • Jan 21, 2010 12:33pm Jan 21, 2010 12:33pm
Yes, that is an excellent tutorial by hanover.

One item that I constantly forgot when I just started out was including spread in my lot size calculation. Some people say "no big deal". Well if you assume 4 pips as an average spread then this is 4% of a 100 pip SL, 8% of a 50pip SL and 20% of a 20 pip SL. That means that your lot sizing would be off by that amount and even on a 100 pip SL it adds up to a large number over time.
  • #10
  • Last Post: Jan 21, 2010 12:40pm Jan 21, 2010 12:40pm
I use both technical analysis to determine my stop position and money management to determine my lot size.

If my stop is 20 pips away and I am risking $500 on this trade, I will trade ($500/.0020) = $250,000 of the currency or 2.5 lots. This means that if price moves to my stop-loss, I will lose $500.
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