Stop loss is one of the major tools of risk management. A stop loss automatically closes your position when a trade goes against you hence limiting your losses.
Your stop loss should be set a few pips from your entry level either up or down depending on the kind of trade you are taking. It should not be too wide or too tight but should be adjusted according to your position size.
Most traders make a mistake of fitting their stop loss to their desired position size instead of fitting their position size to their desired stop loss.
There are different types of stop losses that can be used to while trading to limit losses. These include:
The stop loss is set basing on the percentage amount of money risked per trade.
The stop loss is set depending on volatility in the market. When there is high volatility, set a wide stop loss and when there is low volatility, set the stop loss closer to the entry level. Volatility can be measured using volatility indicators such as Average True Range (ATR) and the Bollinger bands.
Here stop loss is set depending on the time you will spend holding an open position and the trading sessiona you trade in.
Some of the common mistakes made by traders while setting stop loss levels:
- Setting stop losses too tight. They get hit easily.
- Setting stop losses that are too wide. May lead to big drawdowns
- Setting stops losses exactly on the levels of support and resistance. May be hit and price reverses immediately to your predicted direction.
- Shifting the stop loss further when price is about to hit it.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...