Methods of Setting Stop Loss Orders In Trading

Traders using a trading system must have mathematical calculations that reveal where this stop loss order must be placed.

A trader can also set a stop loss order according to the indicators that are used by traders to set these stop loss orders. Certain technical indicators use mathematical equations to calculate where the stop loss order should be set so as to provide an optimal exit point for open trades. These indicators can be used as the basis for setting these stop loss orders.

Other traders also place these stop loss orders according to a predetermined risk to reward ratio. This method of setting is dependent upon certain mathematical equations. For example a ratio of 50 pips stop loss can be used by a trader if the trade has the potential to make 100 pips in profit: this is a risk:reward ratio of 2:1

Others just use a predetermined percentage of their total forex account balance to calculate where to set these stop loss orders.

To set a stop loss order it's best to use one of the following techniques:

1. Percent of account balance

This is based on the percent of account balance that the trader is willing to risk on a single trade.

If one is willing to risk 2 percent of their account balance then the trader determines how far he will set the stop loss order level based on the trade size which he has bought or sold.

Example:

If a trader has a $100,000 account and is willing to risk 2%

• If the trader buys 1 contract

  1 pip = $10

  Then setting stop loss order at 2%

  2% is $ 2,000

  2000 /10 = 200 pips

  Stop loss = 200 pips

• If the trader buys 2 contracts

  1 pip = $20

  Then setting stop loss order at 2 %

  2% is $ 2,000

  2000 /20 = 100 pips

  Stop loss = 100 pips

• If the trader buys 4 contracts

  1 pip = $40

  Then setting stop loss order at 2 %

  2% is $ 2,000

  2000 /40 = 50 pips

  Stop loss = 50 pips

2. Setting Stop Loss Order using Support and Resistance Areas

Another way of setting stop loss orders is to use supports and resistance levels that form on the charts.

Given that stop loss orders tend to congregate at these support and resistance levels key points, when one of these levels is touched by the price, many other stop losses are set off, like dominos. Stop loss orders tend to accumulate just above or below resistance or support levels, respectively.

A resistance or a support area should act like a barrier for price movement and price should not move beyond these points, this is why these support and resistance levels are used to set stop losses, if this barrier is broken the price movement can go toward the opposite direction of the original forex trade trend, but if this barriers (support and resistance levels) are not broken the price will continue moving in the intended market direction.

Stop Loss Level Order Setting using a Resistance Level - Setting Stop Loss Orders using Resistance Levels

Setting stop loss order - Stop Loss Order Set above the Resistance Level

Stop Loss Level Order Setting using a Support Level - Setting Stop Loss Orders using Support Levels

Setting stop loss order - Stop Loss order Set below the Support Level

3. Trend Lines

A trend line can be used to set stop losses where the stop loss order is set just below the trend line. As long as the trend line holds the trader will be able to continue making profits while at the same time set this stop loss order that will lock his profit once the trend-line is broken.

Setting order below the trend line - How to Stop Loss Orders Using Trendlines

Examples of where to set this stop loss order using trend lines.