The market is volatile and very unpredictable, it is impossible to constantly correctly guess the future direction of the market, and in order not to lose everything in one transaction, a stop loss was invented.
Stop loss, like the trend, is our friend.
Without a stop-loss strategy, there can be no profitable trading strategy.
Methods to set Stop Loss
The interest method is a method where the stop will be equal to a percentage of the principal, depending on your risk management.
At the same time, a large number of professionals recommend not to risk 1-2% of the capital in one transaction.
And this method is very popular due to its simplicity and ease of calculation. For example, if your capital is $10,000, and the risk management on each trade is 1%, then the stop loss will be $100, everything is very simple.
This method is based on placing a stop loss behind support and resistance levels.
After several bounces off the levels, you can set a stop loss above the resistance or below the support, because if the price breaks above these levels, then potentially the deal can go heavily against you.
These levels will be our protection, because it will be very difficult for the price to break above the strong levels, but even if there is a breakout, we will be protected by a stop loss.
Another method of setting a stop loss is a method based on time parameters.
This method will be of interest to those who do not want to leave their overnight deals or want deals to close at the end of the week and not stay open on weekends.
Everyone knows the uncertainty that arises on weekends. At this time, it is impossible to close a position, and the news can be dangerous and you can suffer big losses at the opening of a new trading week, to avoid all this, this method was invented.
Each currency pair has its own volatility value. Some couples walk fast and a lot, others walk less.
If a trader knows the average daily range of a particular pair, then he can set his stop loss slightly above this value so that the position is not closed prematurely due to market noise.
For example, if we imagine that the GBP / USD has an average daily moving range of 100 points, so setting a stop loss at 20 points is likely to lead to a premature closing of the position. But, if a trader places a stop above the daily range, he can protect himself from accidental price spikes.
This method forces you to place large stop-losses, thus giving you room to work so that the price does not close prematurely.
Setting a stop loss is a vital condition for any trading strategy. Without a stop loss, you will inevitably lose capital. In the next part, we will look at other methods to set a stop loss.