{"id":10021,"date":"2022-10-14T07:31:39","date_gmt":"2022-10-14T07:31:39","guid":{"rendered":"https:\/\/mdr.foobrdigital.com\/?p=10021"},"modified":"2022-10-14T07:31:39","modified_gmt":"2022-10-14T07:31:39","slug":"how-to-set-a-stop-loss-based-on-a-percentage-of-your-account","status":"publish","type":"post","link":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/2022\/10\/14\/how-to-set-a-stop-loss-based-on-a-percentage-of-your-account\/","title":{"rendered":"How To Set A Stop Loss Based On A Percentage Of Your Account"},"content":{"rendered":"\n

Let\u2019s start off with the most basic type of stop: the percentage-based stop loss<\/strong>.<\/p>\n\n\n\n

The percentage-based stop uses a predetermined portion of the trader\u2019s account. <\/strong><\/p>\n\n\n\n

For example,  \u201c2% of the account<\/em>\u201d is what a trader is willing to risk on a trade.<\/p>\n\n\n\n

The percentage risk can vary from trader to trader. More aggressive ones risk up to 10% of their account while less aggressive ones usually have less than 1% risk per trade.<\/p>\n\n\n\n

Once the percentage risk is determined, the forex trader uses his position size to compute how far he should set his stop away from his entry.<\/p>\n\n\n\n

This is good right?<\/p>\n\n\n\n

A trader is putting a stop, which is in accordance with his\u00a0trading plan.<\/p>\n\n\n\n

This is good trading, right?<\/p>\n\n\n\n

WRONG!!!<\/strong><\/p>\n\n\n\n

You should always set your stop according to the market environment or your system rules, NOT how much you want to lose.<\/strong><\/p>\n\n\n\n

We bet you\u2019re thinking right now, \u201cHuh? That doesn\u2019t make any sense. I thought you said that we need to manage risk.\u201d<\/p>\n\n\n\n

We agree that this sounds confusing, but let us explain with an example. You remember Newbie Ned from your\u00a0Position Sizing\u00a0lesson, don\u2019t you?<\/p>\n\n\n\n

Newbie Ned has a mini account with $500 and the minimum size he can trade is 10k units. Newbie Ned decides to trade GBP\/USD, as he sees that resistance at 1.5620 has been holding.<\/p>\n\n\n\n

As per his risk management rules, Ned will risk no more than 2% of his account per trade.<\/p>\n\n\n\n

At 10k units of\u00a0GBP\/USD, each pip is worth $1 and\u00a02% of his account is $10<\/strong>.<\/p>\n\n\n\n

The largest stop Ned can put on is 10 pips<\/strong>, which is what he does on this trade by putting his stop at 1.5630<\/strong>.<\/p>\n\n\n\n

\"10<\/a><\/figure>\n\n\n\n

But GBP\/USD moves over 100 pips a day! He could easily get stopped out at the smallest move of GBP\/USD.<\/p>\n\n\n\n

Because of the position limits his account is set to, he is basing his stop solely on how much he wants to lose instead of the given market conditions<\/strong> of GBP\/USD.<\/p>\n\n\n\n

Let\u2019s see what happens next.<\/p>\n\n\n\n

\"Stop<\/a><\/figure>\n\n\n\n

And bam! Ned got stopped out right at the TOP because his stop loss was too tight! And aside from losing this trade, he missed out on a chance to grab over 100 pips!<\/p>\n\n\n\n

From that example, you can see that the danger with using percentage stops is that it forces the forex trader to set his stop at an arbitrary price level<\/strong>.<\/p>\n\n\n\n

Either that stop will be located too close to the entry, like in Newbie Ned\u2019s case, or at a price level that doesn\u2019t take\u00a0technical analysis\u00a0into account.<\/p>\n\n\n\n

For all you know, you could be setting your stop right at that level where the price could turn and head your way (who hasn\u2019t seen that before?).<\/p>\n\n\n\n

But because you already got stopped out, you wouldn\u2019t be able to bag those pips! Darn it!<\/p>\n\n\n\n

The solution for Ned is to find a broker that suits his trading style and starting capital.<\/p>\n\n\n\n

In this case, Ned should trade with a forex broker that allows him to trade micro or even custom lots<\/strong>.<\/p>\n\n\n\n

At 1k of GBP\/USD, each pip is worth $0.10.<\/p>\n\n\n\n

In order for Ned to stay within his risk comfort level, he could set a stop on GBP\/USD to 100 pips before losing 2% of his account<\/strong>.<\/p>\n\n\n\n

The math: 100 pips x $0.10 = $10.<\/p>\n\n\n\n

He now has the ability to set his stop to the market environment, trading system, support & resistance, etc.<\/p>\n","protected":false},"excerpt":{"rendered":"

Let\u2019s start off with the most basic type of stop: the percentage-based stop loss. The percentage-based stop uses a predetermined portion of the trader\u2019s account.  For example,  \u201c2% of the account\u201d is what a trader is willing to risk on a trade. The percentage risk can vary from trader to trader. More aggressive ones risk up to 10% […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[872],"tags":[],"_links":{"self":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/10021"}],"collection":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/comments?post=10021"}],"version-history":[{"count":0,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/10021\/revisions"}],"wp:attachment":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/media?parent=10021"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/categories?post=10021"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/tags?post=10021"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}