STOP LOSS

PLACEMENT
lesson 7
streettraderfx
 Theory Part
Lesson 7: Stop Loss Placement
Firstly before we discuss why stop loss placement is part of the
lessons, I want you to recap on the notes that you made from
the previous lesson about "Risk Management" and recall on

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why risk management is important for capital preservation.

Risk Management as we discussed deals with managing your

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risk exposure in the market.
This means limiting losses to the amount that you are

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comfortable with losing on one trade alone.
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The relationship of stop loss and risk management:
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So the issues with Risk Management is for you to determine

how much you are willing to lose on a certain trade and the
issue of applying stop loss is to set it at an area where you don't
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expect the market to trade to for your trade to still be valid.

Should the market trade against you when it's trading below or
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above the level that you set for your you stop loss with your
acceptable risk, you will automatically be taken out of the trade
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with your prescribed risk amount/percentage and not lose

more than that if you are not around to monitor the trade.
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What the size of your stop loss affects in your trading:

The bigger the stop loss:

The smaller the lot size (If you are using a constant risk
percentage.
The longer the trade has to unfold for you to realize profits.
The highest chance of having a high strike rate.

0.10 lot

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The smaller the stop loss:
The bigger the lot size
The less you have to wait for the trade to play out
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The lower your chances of having a higher strike rate

1.00 lot
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Choosing the size of your stop loss depends on the type

of trader you are:
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Intraday Trader (LowerTimeFrame-Trader/Scalper)

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-Smaller stops are relevant

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Swing Trader (Holds a trade for a day or two)

-Wide stops & Small stops are relevant

Position Trader (Holds a position for a HTF move)

-Wide stops are relevant
Keep in mind that the prescribed types of stop loss placements
are not a limiting factor because with proper practice you can
obtain smaller stops entries whilst you are position trading.

Stop loss placement is highly recommended and should you

decide to enter a trade without the use of a stop loss the you

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deserve everything that's coming to you because clearly you
are not taking your trading seriously.

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There is no need to expose your entire capital to the market
thinking that the market will move in your favor because your

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over risked on a trade or you didn't set a stop loss on that one
trade,
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The market will punish you if you think the market is your
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friend.
Keep in mind that one lucky day can end up providing a stream
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of bad days if you think you are invisible in the market so that's
why stop loss placement is really important and also the issues
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of risk management.
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Hypothetical example(s):
We will touch on hypothetical examples of stop loss placement
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and this will also bring in the topic of "Entry Patterns" because
in order to for you to be in a trade you have to know how to
enter a trade and entering a trade means that you should have
you most comfortable and fixed risk percentage outlined and
to also apply stop loss.
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This is an example of a trade with a wider stop meaning that (
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Small lot size, High trade duration, High strike rate).
This is not always very beneficial if you want to see result
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immediately when you are just starting with small funds.

But it is incredible for when you have accumulated more funds
and you want ease and freedom to spend more time with your
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loved ones and not have to spend the whole day looking at
charts.
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Perspective:
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Let's say you are willing to lose $10 on a trade with a fixed Risk
to Reward of 1:5RR, so with a 10 pip Stop Loss - The market can
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only allow you to use a 0.10 lot in order for you to set a stop
loss which if the market goes against you you can be taken out
with only $10 but should the trade win you would make $50
meaning it would be a 50 pips move.
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This is an example of a trade with a small stop meaning that (
Big lot size, Low trade duration, Low strike rate).
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This is very beneficial if you want to see result immediately
when you are just starting with small funds.
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But in order to see results requires practice and a lot of it in

order for you to understand your strategy fully.
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As you saw on the example of Risk Management - Strike Rate is

important, more especially on smaller stop trades.
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Perspective:
Let's say you are willing to lose $10 on a trade with a fixed Risk
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to Reward of 1:5RR, so with a 5 pip Stop Loss - The market can

only allow you to use a 0.20 lot in order for you to set a stop
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loss which if the market goes against you you can be taken out
with only $10 but should the trade win you would make $50
meaning it would be a 25 pips move.
So if we are both targeting the same pip move of 50 pips with
different lot sizes but the risk remaining the same at $10 it
means:

If I'm using a 10 pip stop loss, my lot size will be 0.10 risking $10
while aiming for a 50 pips ,then my profit potential will be $50.

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But if my stop is 5 pips my lot size will be 0.20 and my risk

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amount will still be $10 and my profit potential will be $100
because for every 10 pips I will be making $20 as price unfolds.

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Note
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Keep in mind that the smaller the stop loss, the lower the strike rate, so you
need to make peace with that as soon as possible in order for you to
eliminate fear, doubt and greed to avoid ending up over trading.

Understand the conditions of your strategy in order to not be swayed by the

temporary unfavorable results you have incurred due to the market
conditions you were trading in at that time.