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Udaytrading.com · 08-30-2009, 09:47 PM

Stop loss levels.
This is always the subject of great controversy.

Perhaps the biggest reason it is such a confusing part of any trading method is that it is specifically tailored to each one of us and often times there is no wrong or right way considering certain environments.

Stop loss levels are valuable and I do believe in using them however what helped me have a better understanding of what a stop loss was and how it could better serve me, was to realize that stop loss levels are basically a psychological and financial safety measure. Using a stop loss level such as 50 or 60 pips is simply what I am comfortable putting on the line and what I am willing to lose. But this stop loss by no means suggests that I can determine that price will retrace no further than 50 or 60 pips. It does absolutely no good trying to impose my will on the markets.

Keeping this one fact in mind also allows me to realize that I must have a certain degree of flexibility when using a stop loss level because real market principles come into play around certain support and resistance levels. If by chance my stop loss level happens to be above or below a support or resistance level that is obvious on a chart, I may consider making some adjustments and widening that stop loss to include that potential support and resistance area. Or I simply have the choice to pass on the trade if it is too large a stop loss.

Stop loss levels should be incorporated into your trading strategy, they are there to protect previously earned profits and to conserve capital.

The best way to determine which stop loss level you should use is to simply back test your trading method and notice how deep a retracement goes against you after you have entered the trade. Often times with enough back testing you will begin to see that certain stop loss levels will be sufficient to keep you in a trade during most retracements.

In the beginning of my trading career while trying to use a demo account I experimented with the idea of not using a stop loss. Now with several years of successful trading behind me I see that it is much easier emotionally and financially to use a stop loss level as opposed to not using one.
To me the pain of not using a stop loss level and watching a trade remain open, aimlessly wandering for endless days or weeks was actually more painful. Than accepting the loss and moving on.

In the next article, I will share some of my ideas of how to correctly use lot size and the correct risk factor when placing each trade, better known as “money management”.
Even though some of the ideas I will share may be misunderstood or provoke some controversy, I will describe the correct way to determine how many lots to use on each trade. It may surprise you to know that it isn't the typical way most mentors and text books will tell you.

08-30-2009, 09:47 PM	#3 (permalink)
Udaytrading.com Moderator Join Date: Dec 2008 Location: usa Posts: 32 Thanks: 0 Thanked 3 Times in 3 Posts Rep Power: 0	Important stop loss information you need to know now Stop loss levels. This is always the subject of great controversy. Perhaps the biggest reason it is such a confusing part of any trading method is that it is specifically tailored to each one of us and often times there is no wrong or right way considering certain environments. Stop loss levels are valuable and I do believe in using them however what helped me have a better understanding of what a stop loss was and how it could better serve me, was to realize that stop loss levels are basically a psychological and financial safety measure. Using a stop loss level such as 50 or 60 pips is simply what I am comfortable putting on the line and what I am willing to lose. But this stop loss by no means suggests that I can determine that price will retrace no further than 50 or 60 pips. It does absolutely no good trying to impose my will on the markets. Keeping this one fact in mind also allows me to realize that I must have a certain degree of flexibility when using a stop loss level because real market principles come into play around certain support and resistance levels. If by chance my stop loss level happens to be above or below a support or resistance level that is obvious on a chart, I may consider making some adjustments and widening that stop loss to include that potential support and resistance area. Or I simply have the choice to pass on the trade if it is too large a stop loss. Stop loss levels should be incorporated into your trading strategy, they are there to protect previously earned profits and to conserve capital. The best way to determine which stop loss level you should use is to simply back test your trading method and notice how deep a retracement goes against you after you have entered the trade. Often times with enough back testing you will begin to see that certain stop loss levels will be sufficient to keep you in a trade during most retracements. In the beginning of my trading career while trying to use a demo account I experimented with the idea of not using a stop loss. Now with several years of successful trading behind me I see that it is much easier emotionally and financially to use a stop loss level as opposed to not using one. To me the pain of not using a stop loss level and watching a trade remain open, aimlessly wandering for endless days or weeks was actually more painful. Than accepting the loss and moving on. In the next article, I will share some of my ideas of how to correctly use lot size and the correct risk factor when placing each trade, better known as “money management”. Even though some of the ideas I will share may be misunderstood or provoke some controversy, I will describe the correct way to determine how many lots to use on each trade. It may surprise you to know that it isn't the typical way most mentors and text books will tell you. __________________ L.C.