A stop loss is absolutely critical in swing trading and any kind of trading. Sadly this is often ignored and many traders place trades without stop losses. They are unaware of just how dangerous this kind of trading can be and as a result losing trades easily get out of control and wipe out their accounts in a matter of seconds. Where is the best place to place a stop loss order for a swing trader? What is the best size of a stop loss? Knowing the answers to these questions is crucial for any trader wanting to protect their trading capital and minimizing the risk of trading.
Placing a stop loss anywhere is only a little more useful than nothing using one at all. Stop losses can not and should not be placed randomly. A set of specific rules or a system needs to be in place for placing stop losses. As swing traders are trading the swings in the market, one of the best places to put your stop loss is just below your entry point. More often than not, this is a swing high or swing low in the market. The logic behind this is that if price drops down below your point of entry, then that swing is invalid and cancels out the reason for you being in the trade. The swing high or swing low should not be too close to your point of entry, if it is move your stop loss a little further away. Placing a stop loss too close may result in your trade being closed out as you didn’t give the market enough room to move and you were stopped out.
Once a trader knows where to place their stop loss, the next crucial point is the size of the stop loss. Just how big should a stop loss be to minimize the risk of trading but at the same time maximize the potential winnings from a trade? The most common method of setting a stop loss is based on the size what you expect to gain from any given trade. Basically, you should not risk more than what you could potentially earn. You should never use a stop loss of less than 2:1. Meaning, that what you stand to profit from the trade should be twice as large as what you are prepared to lose. Going any smaller than a 2:1 risk reward ratio will ultimately blow your account in the long run. By possibly earning twice as much as you stand to lose, you only ever need 1 winning trade to pay off 2 losing trades. Hopefully your trading system has a hit ratio of higher than 50 , so in the long run your trading system is profitable as long as you maintain the correct risk to reward stop loss size.
No matter if you trade forex, stocks, futures or any other kind of financial market, always use a stop loss. Stop losses are the best way to protect your precious trading capital and make the most from your trading career.
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