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Where Is the Best Place for Stop Loss and Limit Orders?

Stop Loss and its proper position is the question that I am always asked. Stop loss is a must. You have to set a reasonable stop loss even if you are an intraday trader and you sit at the computer and watch the price movement and all your positions are closed at the end of your trading day.

Stop loss position is very important and you should be able to distinguish where to set it. A too tight stop loss can be easily triggered even when you take the right position. And a too wide stop loss is like having no stop loss.

In addition to showing you the best and most optimum entry point, your trading strategy should be complete enough to show you a proper level for placing the stop loss order whenever it locates a trade setup.

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Where Is the Best Place to Set the Stop Loss?

Stop loss should be placed at the level that gets triggered only when the position you have taken is absolutely wrong.

For example the price is going up. You wait for a reversal signal. The price changes its direction, forms a reversal trade setup, and then starts going down. You take a short position. So the last high that the price has made before it goes down is a resistance level.

Now the question is when you will be realized that taking a short position has been a wrong decision and the price will keep on going up again?

If the price goes up and breaks above the resistance level, it means you were wrong and the uptrend was not reversed. Therefore, you have to be out. That is why professional traders say: You are either right, or you should be out.

So where should you place the stop loss in this example?

Answer: A few pips above the last high (resistance level) plus the spread.

The Importance of the Spread in Short Positions

When you take a short position, you have to add the spread to the value of the level that you consider as the level that stop loss has to be set, because when you take a short position (you sell) you have to buy to close the position and when you buy you have to pay the spread to the broker. You don’t pay the spread when you go short. You pay it when you want to close your short position.

So your stop loss should be a buy order and you have to add the spread to it. This is very important when you trade with the currency pairs that have a high spread. If you don’t do that, your stop loss will be triggered sooner when the price has not actually reached the level you have set the stop loss to.

That is why when you are short and the price goes against you, the stop loss get triggered when the market price is below the level that you have set the stop loss order. When this happens, novice traders think that the broker has hunted the stop loss whereas this is not the case. The gap between the market price and the stop loss level, is the spread that has to be covered before the price reaches the stop loss order level.

But when you take a long position (you buy), you don’t have to add the spread to the stop loss value, because you have already paid it when you bought.

Let me show you some examples.

1. In the below example, you take a short position at 211.74. As I explained above, if the price goes up and breaks the resistance, it means going short was a wrong decision and you have to get out of the market. The resistance level is at 212.39. To set the stop loss, I add 3 to 5 pips to the resistance plus the spread that I consider it 8 pips.

So in this case the stop loss will be 212.39 + 5 pips + 8 pips = 212.52

Stop Loss in a Short Position

2. In the below example, you take a long position (you buy) at 214.37. The support level is at 213.56 and the stop loss will be 5 pips under the support level which is 213.61. So here I don’t have to add the spread because it is already paid when entering the market.

So in this case the stop loss will be 213.56 – 5 pips = 213.61

Stop Loss in a Long Position

3. Now let’s say you take a long position at 1.4642 after the triangle resistance breakout. As you see in the below chart, the price has broken above a Symmetrical Triangle resistance. The big Bullish candlestick is a good confirmation that the triangle resistance is broken. Therefore, you decide to take a long position when this candlestick is fully formed. But the question is where should you place the stop loss?

A broken resistance should work as a support, and a broken support should work as a resistance. It is always possible that the price turns around to retest a broken support or resistance. While retesting, if price succeeds to break below a broken resistance which was supposed to work as a support, then your long position has to be closed, because it is possible that the price keeps on going down.

In the below example, your long position has to be closed if the price goes down, retests the broken triangle resistance, breaks below it and goes down. To determine the stop loss level, you have to extend the triangle broken resistance and then find a suitable position under the broken resistance. In this case it is 1.4588:

Setting the stop loss after a triangle resistance breakout.

As you see there is no special rule for stop loss like “your stop loss has to be 50 pips under the buy price…”. Stop loss level is different from position to position, even with the same currency pair and time frame. Sometimes your stop loss has to be 50 pips and sometimes 250 pips, depend on the trade setup condition.

When you work with longer time frames, you follow the above stages to determine your stop loss position, but as the longer time frames have larger price movement scales, your stop loss value will be much larger. Therefore, your position size has to be calculated accordingly, not to take too much risk.

Your position size is always calculated based on (1) the stop loss size and (2) the risk percentage, before you enter the market. It means when a trade setup forms and you decide to take a position, first you have to determine the stop loss level, calculate and measure the stop loss pipage, and then calculate the position size based on the the stop loss pipage and risk percentage.

When to Move the Stop Loss

When price moves to your favourite direction and you are making profit, you can move the stop loss further to lock some part of the profit you have made. At least, you can move the stop loss to breakeven (entry price) when you are in a reasonable profit, so that if the market turns around, you will get out with zero loss.

For example, you buy EUR/USD at 1.4642 and your primary stop loss level is 1.4588. The price goes up for 100 pips. You can move your stop loss to 1.4642 which is your entry price (breakeven). Then, if the price keeps on going up for another 100 pips, you can move the stop loss 100 pips higher again.

This is a good strategy to maximize your profit when the price keeps on moving to your desired direction for a long time. But keep in your mind that it doesn’t mean that you have to wait until the price hits your stop loss. To protect your profit, when you see a clear reversal signal, or when the trend looks exhausted, you should close your position immediately and get out before it hits your stop loss.

100 pips was just an example. It is not a rule that has to be followed in all positions. It depends on the conditions and trade setups. For example, when you take a position when a candlestick opens, you have to wait for the candlestick to be formed completely and then decide if you want to move your stop loss or not. You don’t move your stop loss immediately when the price moves accordingly.

Hope the above explanation was clear enough and you learned how to set your stop loss. In case you have any questions, just leave a comment and I will get back to you shortly.

Make sure you NEVER trade without a reasonable stop loss and a proper exit strategy.

Where to Set Limit or Target Orders

Limit order is a good thing to collect your profit before you lose it. It is good to control your greed too. It is better to keep a trade as long as it is moving to the favourite direction and there is no reversal signal, but you can set a limit and collect your profit at a certain level. You should not get upset if the price keeps on following the same direction for several hundreds of pips after hitting your limit. You are already out of the game, but there are always new trade setups on the way, and so you can get in and make profit again.

Determining the limit level can be very easy if you make a rule for yourself. For example you say “I will be happy with 100 pips and want my position to be closed when I have made it”. But it can be hard and complicated if you want to determine the final destination of the price and set your limit accordingly. It is always possible that price doesn’t move according to your expectations, and so it changes its direction before hitting your limit. So you have to be careful.

If you like to earn the maximum profit, you have to determine the final destination of a trend. This can be challenging. First you have to find all the supports and resistances. You have to use the Fibonacci levels and extensions in the best way. When you have a long position, any of the Fibonacci levels can make the price reverse, and so they can be your limit.

The only case that is easy to determine the limit is trading a channel which is when the price is moving inside a channel and goes up and down between a support and resistance line. But even in this case, sometimes the price changes its direction before it hits the limit.

A Better Strategy to Set the Limit Orders

Some traders are used to take a few positions at the same time and with the same stop loss, when a trade setup forms. They set a closer limit order for the first position. When the first position hits the target, they move the stop loss of the other positions to breakeven. When the price keeps on moving accordingly, they move the stop loss further, or close the other positions one by one. This is a good strategy to manage the profit your positions make. But make sure to divide the risk you want to take among the positions. For example, if you want to take a 2% risk with a trade setup, and you want to take 4 positions, then each position has to have a 0.5% risk, and you should not take four 2% risk positions.

How to Manage the Stop Loss in Forex Trading

It is very important to know how to take a position and enter the market. But, it is also very important to know how to manage the position and take your risk as low as possible. You have to learn to make your losses as small as possible. You have to learn to take care of your account balance very carefully and religiously. If you learn to limit your losses, you will win. Big and frequent losses make you disappoint. Therefore, while you learn how and when to enter the market, you should also learn how to manage your position and make your losses as limited as possible.

Fortunately, we can set a stop loss for each position. That helps us make our losses limited. It is not only that. We can move our stop losses, and this is a great feature. We should learn to locate the best place to set a stop loss for each position. I have already explained how to do it, however it is also very important to move the stop loss when it is the time to. It is possible that the market moves toward your favorite direction, but it suddenly turns around and hits your stop loss, before it hits the target. However, if you move the stop loss to breakeven when your position is in profit, it won’t have any risk to hold the position anymore.

We had plotted a resistance line on AUD/USD daily chart and we were waiting for its breakout to go long. Finally, the 2014.06.09 candlestick closed above the resistance line and we took a long position at 0.9349 while the next candlestick was retesting the broken resistance. The stop loss was set at 0.9312 and the target at 0.9715 (about a x10 target) which was the next strong resistance level on the daily and weekly chart. We really expected AUD/USD to go up strongly and test the resistance level and hit our target, first because the breakout was a good looking and valid breakout, and second, because AUD/USD market was already a strong bullish market and everybody was talking about the USD more weakness during the incoming weeks.

However, the AUD/USD market became afraid of a smaller and weaker resistance level on the daily chart at 0.9460 and went down even before it reaches the level. It went down to retest the broken resistance. But, it did not hurt us because we had moved our stop loss to breakeven at the close of the 2014.06.12 candlestick. Although AUD/USD started going up again, but it is not always like that. It could break below the broken resistance and hit our stop loss at its original position:

Retesting of the Broken Resistance

You could say that it would be OK if we hadn’t moved the stop loss to breakeven, because AUD/USD would go up after retesting and without hitting the stop loss at its original position.

It is true in this case. But it is not going to be like that all the time. If you don’t move your stop loss to breakeven on time, then it is possible that you lose in several consecutive positions. And this will be too hard to recover, both technically and psychologically. It is not only your money that you have to take care of. You have also have to keep your mental situation always in balance. You can easily lose your confidence if you don’t make your losses limited. And if you lose your confidence, you will give up.

When Is It the Best Time to Move the Stop Loss to Breakeven?

I say as soon as possible. If the market moves toward your favourite direction for a few candlesticks (1-3 strong candlesticks with strong bodies), you have to move your stop loss to breakeven, no matter what time frame you are following. If you have a x3 or x4 target, then you’d better to move the stop loss if the market moves for x1 of the stop loss size. You can collect some profit and move the stop loss to breakeven and let your profit run.

Be aware that sometimes your stop loss will be triggered at its original level before the market gives you any chance to move the stop loss to breakeven. You have to be ready for such a situation too. Something that helps you a lot is that you set a reasonable stop loss. A reasonable stop loss is not too wide and too tight. It is reasonable. Your position size should not be too big, so that if the price hits the stop loss, you don’t lose a lot. As a novice trader who wants to start trading with a live account, you should not risk more than 2% of your account for each trade setup.

Before you start trading with your live account, see the below pages/articles/videos:

  1. Money Management
  2. Leverage, Margin, Balance, Equity, Free Margin…
  3. Forex Calculators

What If You Don’t Like to Lose at All?

If you don’t like to lose at all, you should not trade forex, because even the best traders lose sometimes. However, as it was explained above, you can make your losses as small and limited as possible. Losing money is part of the game. Get used to it.

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49 thoughts on “Where Is the Best Place for Stop Loss and Limit Orders?
  1. Tommy Rendra says:

    Very good article. I am still learning, and recently got hit by stop loss, because the stop loss I put was too tight.

    Just a small checking as I become confused. In your 2nd example, you said ‘ The support is at 213.56 and the stop loss will be 5 pips under the support line which will be 213.61.’.

    Isn’t the 5 pips under the support line should be 213.51 ?

  2. Stu says:

    I don’t get the bit under the heading “move your stop loss.”

    If you have bought and the price is going up, is that not in your favour?

    Why would you have a stop loss in that direction, i.e above your buy price.

    Wouldn’t it go below, so if the price fell you get out?

    It’s confusing to me. I can’t seem to get my head around this. It’s like I see it all upside down.
    I hope you can help my invertedness.

    • Ufoo says:

      Let me try to address this. Suppose you buy EUR/USD at 1.4642 and your primary stop loss level is 1.4588. The price goes up for 100 pips. You can move your stop loss to 1.4642 which is your entry price (breakeven). It means that if the price turns against you and moves even lower than the entry price, you won’t incur losses because the stop loss order will be triggered.

      If the price keeps on going up for another 100 pips, you can move the stop loss 100 pips higher, so that even if things turn against you, you will have a profit of 100 pips already. Hence you have a room of maintaining your position using the adjustable stop loss, as long as the trade is moving in your favor. My two cents worth

  3. Keftin says:

    The importance of stop loss can not be under emphasized. It is very important to be able to know the limit of your stop loss. If you predict the trend and you foolishly place your stop loss a few pips away from your open price then you will be in trouble. The best way to place your stop loss is to place them at reasonable pips away from the opening. If not all will be a waste of time and energy.

  4. Keftin says:

    Mr Stu, it depends on what you are doing at the market. if you are buying then your stop loss will below the buy candlestick which has the opening price. The Take Profit will then be above the open price. Just try and place an order on a up trend view chat. You will place your stop loss below and your take profit above. The prediction is yours to make.

  5. zaman says:

    In the move your stop loss section u mentioned the example if we buy a pair at 1.4246 and primary stop loss at 1.4588 is this right i think our primary stop loss should be lower than 1.4246 .

    Can u please comment

  6. Alejandro O, Bastida says:

    Its very good explanations but I need to practice it someday…..

  7. Alejandro O, Bastida says:

    thanks again, I hope I can familiarise and to master those explanations someday.

  8. Kolawole Mabawonku says:

    Thank you for the information and updates

  9. marek says:

    Hi Chris. I am a novice to and have trouble to position myself with the stop loss…with the small account it seems impossible to gain much results with the stop loss set to 2% risk as…so many times there is a great dollar rush when there can be 1000 points or more rise or fall in matter of minutes…how to protect ourselves from such occurence which seems to happen quite often. Is there any solution for that? Thanks!

    • Chris says:

      Hi Marek,

      If you can set a 2% stop loss, then your account size allows you to do that. I recommend you to follow the long time frames, not to be hit by those sudden big movements that can easily hit your stop loss on the shorter time frames.

  10. manjari says:

    i am novice please tell me how should place stop loss second or third time. i mean if i have sold my 50% stock and i want to change stop loss for remaining stock.

  11. Nel says:

    When you will be realized that taking a short position has been a wrong decision and the price will keep on going up?

    Yes; only when it goes up and breaks the resistance.

    Question on the above, by “breaks the resistance” is that only when it closes above the resitance? Or do shadows count as well?

  12. Nel says:

    I am having a tough time understanding when to place a stop loss while only risking 2% of your account. Because if I place my stop loss above the restistance, that could be a lot more than 2% of my account I could be risking. Do you have any advice on placing good stop losses while still only risking a small percentage of your account? Thank You

  13. Kenneth says:

    Hi Chris, how is moving stop losses different from using trailing stop? Do you recommend trailing stop? Thank you.

    • I don’t use trailing stop loss. When I have a position, I follow the market candle by candle and get out when a strong reversal forms.

      • bonny says:

        Hi Chris,
        In your first example: you used 3+5. Which of them is the spread? And then you 5 and 8 again. Please am a novice here. Why adding 5 twice.Thanks.

  14. bonny says:

    Thank you very much. I thought the message was not delivered

  15. Himanshu Sahai says:

    Hi Chris Sir

    When we go long we already paid the spread. how? Can you explain the logic behind this?

  16. titanium says:

    Hello, Am I the only one having problems reading the currencies values? If a currency go down from 1.13239 to 1.11421, how many pips it counts? Thanks.

  17. titanium says:

    That’s a little tricky. I didn’t thought I could be so hard to calculate pips. Probabily, it is harder than recognize the trade setups. Correct me if I’m wrong, but the tutorial you linked me, it is about how to calculate the pips of more than one candles, right? How can I calculate the pips of a single candle? Is there some easy canculator that doesn’t require any line plotting? Sorry for all the questions, but it is really an important topic. You can’t trade properly, if you don’t know how to calculate pips. Thank you very much for your precious help.

  18. titanium says:

    Actually, I have to edit my second comment. I’ve done some practice with the crosshair tool and it is pretty simple to use. Now I know how to set my stop loss and take profit. Thank you very much, Chris.

  19. Goran says:

    Hi Chris,

    Can you explain please how to close half position size if is posibile to do that, when trade is still running. For example I am in 100 pips profit with 0.2 lot size and when if I close half, trade still running with same SL and TP targets, but now insttead of 200$ profit I have 100$ plus on account balance and 100$ profit running trade. Is it posibile and how?

    Thank you

    • Goran,

      That is possible to close a portion of the position almost with all platforms including MT4. I am going to write a short article about this today.

  20. Goran says:

    Thank you Chris for your understanding.

  21. smart guy says:

    Thank you for the article. Plsase In a case where you have 2 open positions for the same trade in which one has a target and the other does not and price moved in once favour to hit the first target prompting a shift of the stoploss of the other position to make it a free trade. What if price did not move in once direction and goes to hit the stoploss, will that not be double loss and in a way risking too much? Or is there a way the two trades are placed such that even if price moves against ones position, the stoploss will still be one?

    • When you want to take two positions for the same trade setup, you have to split the risk between them. For example if you want to take a 2% risk, then you have to take two 1% risk positions.

  22. smart guy says:

    Ok. Thank you for the clarification.

  23. Nadi brh says:

    Thank you Chris.

    I can not find your last article about STOP LOSS, can you please give me the link to that article?

    Thanks alot

  24. Ivan Todorov says:

    Is it reasonable to move our stop all the time if the market is going in the direction we want? And is it good not to put limit, but to do that chasing the maximum if there is no reversal signal using bolinger bands,candlesticks (paterns) and MACD?

  25. jessica ochoa says:

    Hi.. I have a weird question
    I have a friend that asked me about because he knew i was into it. And as always he said it is like betting and he didnt trust it because one day you can lose all the money. That is when i talked about stoploss and i said i trade with 1% risk of each operation. So basically i can lose max the 1% per operation. He is an engineered so basically he told me my method didnt make sense because if I open 100 trades of 1% of stoploss eventually i will win more. Because not all the trades can go against me so that i would be a millionaire by now.
    Because he said that limited profit with unlimited stoploss gives you the probability of winning at least more than 1% But i am frustrated because i couldnt explain him how this really works.

  26. Joe Kosmicki says:

    I’ve been a stock trader for years (unsuccessfully)and look forward to putting this most interesting site to work. I haven’t seen any articles on the type of order to use when opening a position. Would I use a market or limit order, or something else?

    Thanks for a great site,

    Joe

  27. dragan m says:

    Hi Chris, thanks for the article.

    The hardest things are getting out in the right time and setting the stop loss. Many many times I have found myself in profit, and then waited too long until the price came back to hit my stop loss. Than again I would be conservative and move SL to breakeven, so it would get hit and then the price moved in the desired direction again 🙂 It is so difficult because you cannot make a fixed rule, that is why this is most asked question in trading.

    Example: I bought AUDNZD on 1.2.2017, price jumped and I moved my stoploss to breakeven, then after it got hit on 7.2. it jumped back up..

    Dragan

  28. Jonathan Gillaspie says:

    I have read somewhere on this website that the open price acts as support or resistance. I tend to see this a lot in strong markets. Are there instances that you would suggest using this area for stop placement?

  29. ssy says:

    I always thought you pay the spread when you open a trade using a market order, whether buy or sell. Please correct me if I was wrong.

    When you go long at the market, you buy at the ask price (higher), and when you go short at the market, you sell at the bid price (lower). The same is true when you close the trade. In other words, you will pay the spread twice when you use market orders for both transactions.

  30. Ufoo says:

    Chris this is an excellent article. Thank you very much.