The importance of using a stop loss for each trade is well known, but only some traders consider daily, weekly, and monthly stop loss levels. Losing weeks of profitable trading in one day is poor trading. The market may have changed if your previous strategies have not been performing well. Calm down and give yourself a few days or a week to adjust to the new market environment.
Too many traders are guilty of overconfidence after making profits and avoid exiting their losses. Therefore, setting long-term stop losses is required to trade forex safely. However, sometimes the market is difficult, and learning how to survive over the long term is a skill all professional traders have mastered.
Example risk management plan for trading USDJPY (1 pip = 0.01 yen)
- Stop per trade 10 pips
- Daily stop 30 pips
- Weekly stop 90 pips
- Monthly stop 270 pips
A clear plan of when to stop and re-evaluate your trading will prevent one bad run from taking your account balance to zero. A risk management team tracks traders in banks and hedge funds to reduce the risk of significant losses by using daily, weekly, and monthly stop losses. Individual traders should follow the same practices and use more than per trade stop loss orders.
How do you determine your stop-loss levels?
Keeping a record of each trade will help you set a stop-loss range. Review your past trades to see how much your results vary with different stop-loss ranges. For example, compare your historical performance with a daily stop loss of 50 points to a daily stop loss of 100 points and see which stop loss setting has increased your account balance over the past month. Historical trade analysis can help you understand which trading style and risk management plan best suits your personality.
What to do when your stop loss is hit
Step away from the computer
It is not easy to control yourself when your stop loss is touched. Most traders have stop-loss rules, but the urge to avoid losing money prevents them from following their rules. Once your stop-loss order has been touched, step away from the computer to avoid the temptation to take another trade to recoup your losses. Stay away from the computer until you are relaxed and calm.
Review the results of your trades
After a losing trade, consider why it was a loss. For example, did you follow your trade plan, were your entry points correct, was the volatility higher than expected, did you miss any critical economic indicators, etc.? In addition, notes written during the trade can help you understand the cause of your losses.
Improve your trading strategy
After looking back, you are ready to trade again and have a chance to increase your profits. Improve your trading plan and build a better trading strategy than in the past. After the break, resume trading with a smaller position than before the loss, which can help you regain your confidence. Forget about previous losses and focus on following the plan 100% of the time with confidence.