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Submitted by: Forex Arthur

This question is a subject that is always good for many articles and forum threads.

The reason is that stop loss levels are different for every trader. It s all based on your goal and your trading strategy. Other factors such as the timeframe and the type of analysis you actually do, will also have an impact on the type or size of stop loss you use.

For the purpose of this article I will discuss what I am most familiar with.

I am an intraday trader and I use the 30 minute and one hour chart to time my entries. I do occasionally trade off of the larger time frames such as the four hour and daily chart but regardless of the timeframe I use for my entry, I am always aware of what the larger time frames are printing.

You may read on certain forms or articles that you should not risk more than 30 or 50 pips per trade. This is fine but it is not always possible to squeeze a stop loss level into every trade develops. Each trade as we all know, is going to take a different shape or slightly different set up each time we find one regardless of whether or not all of the rules according to our trading strategy are met for a valid confirmed signal.

I m not suggesting to change the stop loss levels and break your trading rules all the time, what I am referring to is that while we must provide some structure to our trading strategies in the beginning, which are also considered the foundation, as a successful trader you must learn to allow for a certain degree of flexibility because of the understanding that the markets do not behave the way we want them to. It moves in any manner it chooses. At best we can only hope to follow and keep up with price and the trends.

Using my example of locating a trade on a 30 minute chart, I have two specific trading strategies that allow me to trade in different types of market environments. These market environments are mainly a range bound or consolidated market and a trending market.

For example a technique I use on a 30 minute chart with a consolidated market, I m looking to locate support and resistance that is relative to that time frame. Support and resistance can be many things but you have to start somewhere. A technique that is simple to use is to identify the previous day high and low. Once the new day has started and as price approaches either the support or resistance of the previous day notice how price behaves. If price cannot break beyond this range it s possible it may remain inside a consolidation and bounce off of the support or resistance level from the previous day.

If this occurs I would look for an obvious reversal candle pattern.

Now there are several different methods that can be used to place your stop loss. The first is obviously several pips above the high or the low of the candle pattern were price appears to be moving away from.

Using this method, it is obvious without even looking at a chart that each time the stop loss level will be different and it will not be possible to pick the same number such as 30 or 50 pips stop on every single opportunity that sets up just like the aforementioned.

Because we never know where the candle will close that completes a reversal candle pattern according to the high or the low, it is difficult to simply place the same static stop loss level.

A strategy that I use and you may find useful, (however please do not apply this immediately to your trading strategy without testing and research), is to incorporate certain indicators that will assist you in confirming whether price will move away from the support resistance with more certainty.

Bollinger bands, if studied correctly and a favorite indicator of mine, the CCI indicator, helps me determine with more certainty if price is to remain inside of consolidation and if it will move away from support or resistance.

If everything lines up correctly for me using these indicators, (and I stress it can take years of practice), I can use a stop loss level of approximately 25 pips every time I use this technique on the euro/USD.

Obviously it s not going to work every single time. But 85 to 90% of the time if identified correctly and I wait for the confirmation using my indicators, this trade can be a very safe and effective trade which allows me to use the same size stop loss on every trade just like this one.

The profit target on a trade like this is at least the same size as the stop loss but in 85 to 90% of the time it will move an additional 25 pips turning the trade into a two for one risk to reward ratio.

This is what you want to achieve.

A strategy that will offer consistent profits with affordable risk.

In order to find this technique or the strategy it may take you months or years depending on the amount of time you have available. Testing and research is not an option, it is the only way.

So back to the question, what is the right stop loss to use?

This technique using a 25 pip stop evety time will obviously not work on a four hour or daily chart, the stop loss and profit targets would be much larger than what I would use on a 30 minute chart.

At this point it should be obvious that stop loss levels should not be a static number set on every trade on every timeframe.

The stop loss placement should be relative to the type of trading environment and the timeframe that is traded. Also, what you expect to earn from the trade and what you are willing to lose will help you to define your parameters for an affordable stop loss level.

Unfortunately there is no one set answer, and each one of us in order to become successful will have to do our homework, spend months if not years practicing, training and learning all the while developing confidence and a solid trading system.

Thanks for reading and good luck trading.

Forex Arthur.

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