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Optimal Stop Loss Placement (10 Rules) ESSENTIAL for Profitable Trading Online!


A stop-loss is simply an order that we set
to ensure that our trade will be closed if it goes against us more than a
certain amount. The main takeaway from this video and the main point is that
most traders made the mistake of setting a stop-loss with a monetary value in
mind, so setting the stop-loss at the point which is the most that
they’re willing to lose for that trade or something along those lines.
What I want to convey is that a stop-loss should be considered as the point at
which you have been proven wrong. I think this is the best way to think about it
because the way that you should approach trading is that each trade is in essence a
hypothesis. You think that a market is going to move in a certain direction
therefore you set up a trade in line with your hypothesis and your stop-loss
should be set to close that trade at the point in which you have been proven
wrong. There’s also a lot of other things to bear in mind and we’ll go through a
few examples in this video. So the first example is from Bitcoin and
it’s actually just from last night so last night Bitcoin was trading right
around here ten thousand three hundred-ish and my
hypothesis that my trade was based on was that this breakout here was the main
direction of the move and that this was simply a retest of this line, it doesn’t
matter if you don’t understand exactly what I mean by that or why, the point is
that my hypothesis was that the market was going to go down from here, so I
entered a short trade and then I asked myself the question: at what point would
I be proven wrong? at what point am I willing to throw in
the towel and say ok this trade did not work out and close it and this is very
important in two different respects. The first one is that if you’re proven wrong
or when you’re proven wrong you want to lose the minimum, so once you’ve been
proven wrong there’s no point in hanging in there and losing more and more money.
You should just close your trade and minimize your losses. The flipside is
that you want to have a good idea of when you’ve been proven wrong somewhat
definitively because otherwise you may risk closing a good trade too early. So
if we look at this example if I’m going short here
a common mistake would be to place the stop-loss too close, so in placing a
stop-loss traders often look at the most recent highs, so a common stop-loss might
be just above these little wicks here so let’s say around ten thousand three
hundred and fifty maybe ten thousand four hundred something like that.
Another level you might look at is this or this and this kind of range I think
would definitely be too narrow especially considering the nature, the
volatile nature of Bitcoin and you can kind of see that by considering this
point: you may have easily had the same trade in mind that I was just discussing
here i.e. going short and if you put your stop-loss just above this level it might
have got hit by this next candle so there’s a good chance that if I go short
here there might be another candle that reaches right around here
before going down. On the other hand there’s no point in me setting my
stop-loss way way way high because by that point it’s already very clear that
the short trade was a bad idea so I think the optimal point in this
example would be somewhere around this kind of level because it’s so the 10,500
level and that is for a few reasons one is that it is decisively above these
highs it is close to these previous highs and it is also back inside this
channel and if the price manages to get back in the channel that is quite a
bullish sign like you can see here for example it might slip out but once it’s
back in it’s usually on the rise again so I might expect it to just bounce off
here but I think once we’re in the 10,500 ish range then you can be quite
confident that your short was not a good trade you also want to be considering this
from a risk/reward point of view so in this example if you set your stop loss
at ten thousand five hundred and you’ve entered the trade at around ten thousand
three hundred then your potential loss your maximum loss for the trade would be
around two hundred points your up side on the other hand depends on again your
hypothesis your short hypothesis so are you trading because you think the price
is gonna reach this kind of level or are you trading because you believe that
it’s gonna go even further whatever the case you need to make sure that you have
a good reason to believe that and that your upside which in the case of a short
is on the downside is a significant multiple of what you’re risking so if
you’re risking 200 you want to make sure that your profit can be at least let’s
say six hundred eight hundred a thousand in this example with the benefit of
hindsight the most likely level was that it was going to bounce back off this
downward channel so around nine thousand six hundred so if I’ve entered at ten
thousand three hundred my potential profit is seven hundred and my downside
is two hundred so this is a nice a symmetric bet which is always what we’re
looking for your stop-loss should also change
depending on the volatility of the market that you’re trading and the
timeframe that you’re looking at so in this example you can see the time frame
of each candle is four hours so it’s a pretty short time frame and this is more
day trading whereas if we look at this example from today you can see that the
hypothesis for the trade is based on about two years worth of price movement
these candles are weekly candles and you can see here the breakout from this
formation so your trade hypothesis and your stop-loss need to be looked at on
the same timeframe so here if you’re trying to trade this breakout and you
think that it’s a valid breakout based on your technical analysis you’re
expecting this to go upwards towards the 120 range or so so at what point would
you throw in the towel at what point would you set your stop loss there’s not
much point in setting it let’s say here or here because you could well be right
in your long trade but still get taken out due to the minor fluctuations within
the major trend a sensible point might be around here just before the breakout
occurred so around the 109 point four level or maybe just below the previous
weekly close one o eight point two if you want to be conservative but anything
much more than that and you’re just losing money because your trade has
already been disproven for example there’s no point in putting your
stop-loss down here the timeframe with which you look at a chart makes a very
big difference so if here we switch from the weekly view to daily we can still
clearly see the breakout but you might be more tempted to set your stop-loss
below today’s candle say here and the further you zoom in the less sense it
makes the harder it becomes to see the picture that you are actually trading it
really does depend on the view that you’re taking and the leverage that
you’re using there are many many factors but in this example where we’re trading
trying to trade a breakout the short-term fluctuations are often such
that the price can come back down to retest the support level which in this
case if it takes a few weeks to come back down
could easily be 109 point two point three so if your stop-loss was higher
than that you would be taken out but the price might then hit this level and
bounce back up as you had expected and that’s why you should have it at least
below the support level you could see this clearly in the previous Bitcoin
example right here if you had traded this breakout from this channel on the
short side and you had set your stop-loss
to close let’s say here for example at ten thousand two hundred and fifty you
would have been taken out by this retest of the resistance level so you should
always take into account the potential trajectories of the price and ask
yourself which ones would I be willing to tolerate and keep my trade open
because it’s still potentially correct and which on the other hand would mean
that my trade was wrong and should be closed so let’s say you do want to open that
dollar yen trade that we were talking about long and you want to set a trade
which is a hundred dollars in value and you want your stop-loss
to be around 109 point five this is very helpful in showing you the amount that
you would lose at this particular stop-loss level but what you should be
really focusing on is the rate now at the moment it’s not letting us go any
lower you can actually adjust this later on if you open this trade you can then
manually lower the stop loss and the additionally required funds will be
taken out of your available balance but by default this is set to 50% so see
you’re losing 50% of your trade size so if you do want to set your stop loss at
a lower level and we had decided on 109.5 and you think this is too much
money for you to lose then don’t set the stop-loss higher because then your trade
no longer makes sense simply reduce the amount of the trade until you’re happy
with the stop-loss so if we reduce it down to 75 this might be a more
acceptable amount to you and this is just in relation to your total account
so it’s a risk management consideration but you should never look at the
stop-loss amount in isolation when trying to
determine the optimum stop-loss level because that doesn’t really make sense
so still we can’t reach the 109.5 and that’s because of our leverage because
you can see this is a different topic but in just a few words
the higher your leverage the tighter your stop-loss is going to have to be
because your position is actually bigger so if we reduce the leverage to 20
you’ll see your position your exposure go down from 2250 to 1500 and now your
same loss has moved from occurring at 110 something to 109 point 3 so now we
can actually set it to our desired 109.5 and you can see this would be the amount
if we want to manage the risk we can go even lower so maybe we want to do a 10x
leverage and now this is only 23% of the position as opposed to over 50% before
and you can see the amount has gone down so maybe at this point you could
actually increase the position and your losses would still be smaller than
before these leverage considerations can be a
little bit complicated but I will make another video about that specifically
it’s out of the scope of this video but I just wanted to touch on it because it
can be a useful thing to do in order to reach the stop loss that you need so
remember if the stop loss that you’re trying to reach is lower than what
you’re currently allowed then you should be decreasing your leverage finally this
may be an obvious remark but do remember to always set a stop loss when you’re
trading the higher leverage the more relevant this rule is if you don’t set a
stop loss you might end up losing a lot more than you had planned or than you
wanted and more importantly you’re deviating from your trading strategy
because you’re still losing money even after your trade has been proven to
be wrong this is especially true with markets such as Bitcoin where things can
move very very quickly so you should just get in the habit of when you place
your trade whether that be a market order or a limit order make sure that
you also set the stop loss at the same time so as we’re talking about setting
stop losses we can’t not talk about moving stop losses the main message
should be don’t do it because it’s usually very unproductive although there
are some cases when it can be good the main reason why you shouldn’t be doing
it is because because as we discussed previously when you open a trade you
should already have a well-defined plan and you should have already accepted
that if your level you’ll stop loss that you have carefully chosen and gets hit
then that’s fine in fact you should be happy that you are losing what you have
considered to be the minimum for that trade and you don’t want to waste a
single more dollar on it psychologically though it can be tricky especially if
you’re watching the price move and you see it approaching your stop-loss it can
be very tempting to just move it a little bit further down and a little bit
further down but then before you know it you’re just adding more and more money
to a trade that has already gone bad and that doesn’t really make sense so the
general rule should be never move a stop loss downwards and knowing that you’ve
carefully chosen that stop-loss in the first place for a reason helps you have
the confidence to not move it one of the keys to being in consistently profitable
trader is to cut your losses short and let your winners run you need to try and
remove emotions as much as possible from trading especially related to
losses they’re gonna happen they’re inevitable and in fact you should expect
to have a high frequency of small losses but that will be hugely outweighed by a
minority of very big gains the only real time that you want to be moving a
stop-loss is when you’re effectively using it as a take profit on the
downside so let’s take this Bitcoin trade as an example as I mentioned I
entered the trade around here and I went short so at this point as the trade has
moved significantly in my favour what I’m trying to achieve is a balance
between protecting the profits that I’ve already made but also not putting a stop
loss that is too tight and therefore doesn’t allow my profits
to keep on running so as you can see here if at this point I had set a stop
loss around here I would have already been taken out and I would have just
sacrificed this amount of profits on the other hand if I set it way way way up
here then maybe I’m giving away too many of my profits what a lot of people tend
to do is they will when a trade has moved significantly in their favor they
will move their stop loss to their entry price so they will move their stop-loss
from where it initially was so in the case of this trade around ten thousand
five hundred to the point where they entered the trade ten thousand three
hundred and something the reason for this is mostly psychological because it
puts you in a position where you feel like you can only make money or
breakeven and so nothing bad can happen but the money that you have made from
this trade already going your favor is already yours and you should treat it as
such you should protect it just the same way that you protect the money that is
already sitting realized in your account so you really need to be asking the same
question as when you initially set your stop loss at what point of price
retracement are you going to accept that this trade is now moving back against
you and therefore you want to bank the profits that you can in this example
it’s probably somewhere around this kind of level you can see there’s a lot of
movement and a lot of reversals in in this price range and so if it breaks
above that there’s a good chance that it might be heading back up again so let’s
take a look at my actual trade so here you can see I opened this trade at an
entry price of ten thousand three hundred and eleven point five and the
mark price the current price is just above nine thousand seven hundred so
considering the leverage that I used which was very high because it was just
a short-term trade we’re currently up by about three hundred percent as I said I
had initially set my stop to about ten thousand five hundred but I’ve now moved
it to ten thousand and eleven so ten thousand eleven so ten thousand eleven
if we take a look at the chart is just above this resistance level that I’d
pointed out but I decided for an extra safety net just above the ten thousand
point just above ten thousand and the reason for this is that it’s a very
important psychological level so if we do breach it we’re probably going to be
going much higher but often it’s a tough level to penetrate you can see it’s it’s
been tested many times in the past and it often bounces back off it if you’re still learning how to trade
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