Setting Stops/Money Management

EUR/USD 4HR support/resistance

Without a doubt, mastering stop settings is the most demanding trading challenge.

Reviewing my blog you can see that it is relatively easy to learn to spot profitable setups.  Consistently choosing the most profitable stop settings requires more attention and experience.

You can learn to find your stops as part of your trade setup.  If the stops are not clear cut do not take the trade.  A setup without good stops is a bad setup. If you can not find a good setup with good stops then take a trading vacation, and enjoy yourself.

Support and Resistance ALWAYS determine where you place your stop loss and profit settings.Double click on this 4 HR chart and you can clearly see lines of support and resistance that are repeatedly hit as the currency pair works its way down the trendline.  When you enter trade setups place your stops on the other side of support and resistance.  The setups you choose to trade should have clearly defined stops just the other side of resistance and support lines. 4HR charts are a good place to begin your search for strong support and resistance.  The 4 HR charts will produce higher probability trades. S/R found on smaller time charts will have significantly less strength.  Try to use the smaller charts only to firm up the price level you are targeting, and the actual reversal or breakouts.

Determining the size of your stops is a personal decision and a personal challange.  You need to factor in your experience, the average range of the currency pair, risk tolerance, trade size, fundamental expectations, belief in the current trend.  How well you set your stops will determine whether you are a successful trader or not.

My personal experience is that I usually err too making my stops too tight. This is probably due to having focused more attention on day trading than longer term trades.  If you find this happening to you, you need to recalibarate your stop sizes for longer term trades.  You will never make money as a trader if you consistently set your stops too close.

There are other ways to determine stop settings.  Some longer term traders use 20 day ATR to calculate stops as discussed in the Weekly Setup post. Another factor to include in your stop calculations is your potential profit.  Your stop profit should be at least 1 1/2 times your stop loss as determined by S/R levels.

The following u tube video helps one to learn to set stop loss positions.