Here is why you need a stop loss and how to scale it appropriately

Here is why you need a stop loss and how to scale it appropriately

A standard trade setup on the MT4 platform is defined by Entry Point, Stop loss and the Take Profit level. These three attributes of a trade setup are what determines how much you rip from the market or how much money you lose when expressed as your margin exposure. However, when technically looking at the trades on a long term perspective, how you manage your stop loss determines your growth rate as well as your success rate. By basic understanding, lack of take profit will never eat up your margin, but rather the lack of a stop loss. In this particular instance we are going to focus on how you can scale your stop loss effectively.

If you get to peruse through most trade journals of successful Forex traders you will realize many times their stop loss gets hit than their take profits. It is not the number of winning trades that keep them going in this business but rather how well they retain their account margin, by their stop loss and exposure in every trade setup they execute. Since Forex trading is majorly about the probability of price moving in a predetermined direction, there are chances it might not meet your expectation and you will lose money in such instances. What if you had no stop loss and price continues moving in the opposite direction from your entry point? The underlying reason for setting up of a stop loss is to minimize losses.

Here is how to scale your stop loss appropriately

Normally, your stop loss is defined in your trade plan, where you set the maximum span of a stop loss in each trade setup as a percentage of your account margin. However, there are instances this rule might not feet in the market at the time you want to execute a trade. In such a case, you will need to adjust your stop loss appropriately in this way explained below:

From the technical view:

Looking at the price chat on the MT4 platform you can certainly predict how far price might extend or how far it might retrace from your current stand point. From this view, you will determine your entry level and take profit levels on the MT4 chart.

From your trading plan:

From your trading plan, there is a predetermined percentage of your margin allowed to expose in any single trade setup. This allowed exposure should now be sized with the stop loss level you noted on your MT4 chart. In a hypothetical case example, you identified a maximum 30 pip stop loss level on the MT4 chart and your trade plan allows a maximum 1% margin exposure. You have a $1,000 margin deposit on your trade account and therefore you can only expose $10 at most in any given single trade setup. This margin exposure should be divided by the 30 pips you identified on the trade chart to give you 0.3 figure, which should be your lot size. In this case, each pip accounts for 30 cents of your trade account margin.

If price does not move in your favor you will lose only 1% in your margin. However, if price moves in your favor to your

What you also want to ensure is, you are investing your trades in the highest probability setups based on chances of hitting your take profits. This will reduce chances of your stop loss getting hit and will also raise your success rate. You are not advised to adjust your stop loss or take profit level after the trade setup is executed as you should have done so during the analysis stage.

You can choose to trade without a stop loss, but in the long run the undesired probabilities will catch up with you. Stick to a proper stop loss scale as explained here and look out for the highest probability trade setups.

Categories: Tutorials
Tags: stop loss


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