Most forex traders are aware of the importance of setting a stop loss when they enter a trade. But many are still unsure about how many pips their stop loss should be. They debate and worry about whether they should have a 20 pip stop loss or a 50 pip stop loss.
In this blog post, we will look at some factors to consider when deciding on your stop loss size. Let’s first answer: How many pips should a stop loss be?
There is no definitive answer to the question of how many pips should your stop loss be. The appropriate amount will vary depending on factors such as the volatility of the currency pair you are trading, your risk tolerance, and your overall strategy. That said, most traders would agree that a good starting point is to set your stop loss at least 20-30 pips away from your entry price.
Stop loss is actually a point that you would set as an automatic exit for your forex trades if it moves against you. The stop loss should be placed so that when you get hit by the price being executed on your stop loss, it will stop your trade immediately instead of letting it go ahead and hoping that there is too much profit in order to make up the losses than take profits.
How Many Pips Should a Stop Loss be
There is no one-size-fits-all answer when deciding how many pips to set as a stop loss. The appropriate amount will vary depending on factors such as the pair you are trading, risk tolerance, and overall strategy.
A good rule of thumb is to never risk more than 2% of your account balance on a single trade. If you have a $100 account, you should never lose more than $2 per trade.
If you are trading the EUR/USD pair and you have a stop loss of $1.20, your potential loss is 1 pip ($1.20) so it’s better to place your stop loss at $1.10 (this is not a recommended strategy but it’s just an example).
If you think that the Euro/USD pair will go as far as $1.40 then placing your stop loss at $1.30 could be a good idea because if the price goes to $1.40 then your stop loss will become worthless because it would be too small, then you can move it up and say: “I don’t like this move but I still want to get in” and place your stop loss at $1.40-50 which might give you a better chance of making money than placing it at $0.70-80 which would actually cost you money!
What Factors Influence the Number of pips for a Stop Loss
There are many factors influencing the number of pips for setting stop loss but are not limited. The following are some of them:
1-Market Volatility – this is a significant factor when setting stop loss because it influences the number of pips you need to place in your order. The volatility of stock and forex currency pairs varies with market opening and closing times.
Traders need to adjust pips distance from stop loss according to volatility. The most important thing to remember is that your stop loss shouldn’t be too close to the price of your trade. This is because it will give you too much power over the market, and cause you to lose money.
2-Time Frame – if you use a shorter time frame, you will have to place fewer pips on your order than if you use a longer-term time frame. The time between when you enter a trade and when you exit it mainly decides your stop loss position.
If you enter a trade within minutes or hours, then only very few pips are required to close out your position. However, if you enter a trade after hours, or even days later, then more than one pip can be required to get out of it.
3-Market Condition – if the market is volatile and unstable, then you may need to place more pips in order to get profitable trades as it becomes difficult for traders to predict the next move of prices in the market
4-Position Size– The bigger your position size is, the more risk exposure it has. Therefore, if you’re trading small amounts (less than 100 000 pips), then it’s easy for you to lose money on any given trade due to slippage or price movements outside of your control.
However, if you’re trading large amounts (1 million pips or more), then you will experience less slippage and price movement outside of your control when placing your stop loss orders because there are fewer trades being made overall on each side of the market.
5- Percentage Of Risk – How much money is at risk in any given trade? The more money you have tied up in any given position, the more critical it is to close out quickly and at a small loss.
This will generally require more pips than positions with less risk that are closed out more slowly or with no loss because such trades will be liquidated as soon as possible (by shorting through an exchange’s order book).
6-Leverage– The first factor to consider is the leverage you have at your disposal. If you trade with 500:1 leverage, your initial margin requirement will also be 500 times greater than if you trade with 100:1 leverage.
Therefore, any potential losses will also be magnified. This in turn means that your stop loss should also be positioned further away from the entry point than it would be if you had lower leverage. A good rule of thumb is that a trader should allocate enough margin to cover 10-15% of their position’s value before setting a stop loss level.
7- Broker’s Terms & Conditions- Whether your broker allows stop-losses on its platform (most do not). Suppose your broker does not allow stop-losses on its platform but.
8- Stop Loss of Long Vs Short Position- Suppose you’re going long on a position and have identified a target price level within which you want to take profits. In that case, it makes sense to set your stop-loss below that target price level – because this will give you more room for profit in case the price moves against you during the remaining period of time between entry and exit points.
On the other hand, if you’re going short on a position and want to lock in as much profit as possible before closing out an existing position (for example, if markets are moving against your position), then it makes sense to set your stop below the lowest point at which prices might fall before they bounce back again – because this gives.
Recommended Pips for Setting Stop Loss
When it comes to setting a stop loss, there is no easy answer. The number of pips you set for your stop loss will depend on various factors, including your trading strategy, the markets you’re trading in, and your personal risk tolerance.
However, you can follow some general guidelines when deciding how many pips to set for your stop loss. In general, it’s advisable to set your stop loss at a level where if the market reaches that point, it would trigger an automatic sell order and get you out of the trade.
Most traders agree that a good starting point is to set your stop loss 20-30 pips away from your entry price.
Tips to Set Pips for Stop Loss
Most traders agree that a good starting point is to set your stop loss 20-30 pips away from your entry price. This gives you room for the market to move against you before triggering your stop loss and can help avoid being stopped unnecessarily.
Of course, you will need to adjust this according to the volatility of the pair you are trading and other market conditions.
Below are some useful tips to consider:
- Stop loss should always be based on your profit target
- Stop loss doesn’t need to be a specific amount of pips
- Stop loss can be based on the composition of your trading strategy
- Stop loss should be placed in an area of natural support or resistance
- Stop loss is often personal
When determining the distance of your stop loss level, use a number that isn’t too close to your entry point. The more pips between your entry and stop, the easier it will be to make partial profits and keep a running account balance.
That being said, don’t make it too far away from your entry point either—you need to find that balance for optimal results.
We suggest finding a percentage of your position size and using that as your stop loss amount. This way you won’t be thinking in terms of pips, but rather percentages. So if we say to use a 1% stop loss, then you don’t worry about choosing a pip value.
Instead, you’ll likely just round up and make it 2 pips instead of 1. The key here is not to get too caught up in the specific numbers, but rather to focus on finding the right balance between risk and reward.