Preschool>= Lesson Status ?
Kindergarten>= Lesson Status ?
Elementary>= Lesson Status ?
Grade 1 Support and Resistance Levels
Grade 2 Japanese Candlesticks
Grade 3 Fibonacci
Grade 4 Moving Averages
Grade 5 Common Chart Indicators
Middle School>= Lesson Status ?
Grade 7 Important Chart Patterns
Grade 8 Pivot Points
Summer School>= Lesson Status ?
High School>= Lesson Status ?
Grade 9 Trading Divergences
Grade 10 Market Environment
Grade 11 Trading Breakouts and Fakeouts
Grade 12 Fundamental Analysis
Grade 13 Currency Crosses
- What is a Currency Cross Pair?
- Crosses Present More Trading Opportunities
- Cleaner Trends and Ranges
- Taking Advantage of Interest Rate Differential
- Obscure Crosses
- Planning Around News and Fundamentals
- Creating Synthetic Pairs
- Euro and Yen Crosses
- How to Use Crosses to Trade the Majors
- How Cross Currency Pairs Affect Dollar Pairs
- Summary: Currency Crosses
Grade 14 Multiple Time Frame Analysis
Undergraduate>= Lesson Status ?
- Why Keep a Trade Journal?
- Benefits of Keeping a Journal
- What Should You Record in Your Journal?
- Potential Trading Area
- Entry Trigger
- Position Sizing
- Trade Management Rules
- Trade Retrospective
- Trading Journal Statistics
- Reviewing Your Trading Journal
- Difficulties of Keeping a Trade Journal
- Summary: Keeping a Trade Journal
Graduation>= Lesson Status ?
- Which Trading Style is Best for You?
- Which Currencies Should You Trade?
- What is Your Level of Trading Experience?
- Should You Be a Discretionary, Mechanical, or Hybrid Trader?
- What Kind of Mechanical System Suits Your Personality?
- What is Your Attitude Towards Risk?
- What Kind of Stop Suits Your Trading Style?
Top Usage Mistakes
In this section, we'll talk about the common mistakes traders make when using stops. Sure, it's one way to practice proper money management but when used incorrectly, it could lead to more losses than wins. And you don't want that, do ya?
Placing Stops too tight
The first common mistake is placing stops tighter than those leather pants that Big Pippin used to wear back in the retro days. They're so tight that there ain't no room to breathe!
In placing ultra-tight stops on trades, there won't be enough "breathing room" for the price to fluctuate before ultimately heading your way.
Always remember to account for the pair's volatility and the fact that it could dilly-dally around your entry point for a bit before continuing in a particular direction.
For instance, let's say you went long GBP/JPY at 145.00 with a stop at 144.90. Even if you are right in predicting that the price would bounce from that area, it's a possibility that the price will still dip 10-15 pips lower than your entry price before popping higher, probably until 147.00.
But guess what? You weren't able to rake in a 200-pip profit because you got stopped out in a jiffy.
So don't forget: Give your trade enough breathing room and take volatility into account!
Using position size as a basis for stops
We've mentioned this earlier in the lesson already: Using position size instead of technical analysis to determine stops ain't such a good idea. We learned that from Newbie Ned, remember?
As we discussed, using position sizing to calculate how far your stop should be has nothing to do with how the market is behaving. Since we're trading the market, it'd make much more sense to set stops depending on how the market moves.
After all, you picked your entry point and targets based on technical analysis so you should do the same for your stop.
We're not saying that you should forget about position size completely. What we're recommending is that you should decide where to place your stops first BEFORE calculating your position size.
Placing stops too far
Some traders make the mistake of setting stops way too far, crossing their fingers that price action will head their way sooner or later.
Well, what's the point of setting stops then? What's the point of holding on to a trade that keeps losing and losing when you can use that money to go for a more profitable one?
Setting stops too far increase the amount of pips your trade needs to move in your favor to make the trade worth the risk.
The general rule of thumb is to place stops closer to entry than profit targets.
Of course you'd want to go for less risk and bigger reward, right? With a good reward-to-risk ratio, say 2:1, you'd be more likely to end up with profits if you're right on the money with your trades at least 50% of the time.
Placing stops exactly on support/resistance levels
Setting stops too tight? Bad. Setting stops too far? Bad. Where exactly is a good stop placed then? Well, not exactly on support or resistance levels, we can tell you that.
How come? Didn't we just say that technical analysis is the way to go when determining stops?
Sure, it's helpful to note nearby support and resistance levels when deciding where to place stops.
If you're going long, you can just look for a nearby support level below your entry and set your stop in that area.
If you're going short, you can find out where the next resistance level above your entry is and put your stop around there.
But why isn't it a good idea to put it right smack on the support or resistance level?
The reason is that the price could still have a chance to turn and head your direction upon reaching that level. If you place your stop a few pips beyond that area then you'd be more or less sure that the support or resistance is already broken and you can then acknowledge that your trade idea was wrong.
While you are logged into your account,
you can save your progress in the School of Pipsology!
- Stop Loss? What's That?
- Equity Stop
- Chart Stop
- Volatility Stop
- Time Stop
- Top Usage Mistakes
- How to Execute Stops
- Summary: Setting Stops