In today forex faq, we have a question from one of our fellow readers asking me about the setting up of stop loss, take profit and breakeven trades. In fact, this is one important thing all traders have to know in order to trade.
Below is the question
Can u pls advice me how to setup stop loss, take profit and breakevens trade. appreciate ur reply. thanks
So first of all, I will presume that you do not have a strategy on hand as the above is what a proper strategy must have in order to work. So you must be trying to formulate your own strategy which is a good thing to do.
I have written a post in the post that could be of help to you if you are formulating your own strategy.
So now let me go through your question one part by one part
1) Stop Loss – There are several ways of setting a stop loss and one of the popular way is to set it at a major support and resistance level.
For example, you enter a BUY trade and you find a strong level of support below your trade, you can then set your stop loss 5 pips away from that level of support.
Another way will be to set your stop loss according to a fixed pips per trade like what I do for my break the bands strategy. You will see that all the trades have a stop loss of 25 pips and target profit of 50 pips.
However you cannot just set it as 25 pips because you like it. I have done a lot of testing to come out with that value.
Similarly you will have to move your chart back to a few months ago and then do backtesting to find out where is the best stop loss.
2) Target Profit – The way you set your target profit will be the same as stop loss. You can either use a level of strong support or resistance as a place to place your target profit or you can use the fixed target profit method that I use for my break the bands strategy.
For example, if you are entering BUY option, you will then set the target profit 5 pips short of a major resistance level.
As for the fix target profit method, you will have to do a proper backtesting before you can decide on the value.
3) Shifting of Stop Loss – If you have been following my blog or you are a student of my course, you will know that I have the habit of shifting my stop loss to breakeven when the price has moved certain pips in my favor.
After trading for so many years, I have learned that protecting my account is one of the most important things to do in trading.
When I am new to trading, I am always looking at the profits and never really care about protecting my account.
During my trading, I have encountered trades that suddenly reverse after making 30 to 40 pips and hit my stop loss. It really frustrate me a lot as I see the profits being eaten up and eventually the price hits my stop loss.
I believe that a lot of your guys must have the same experience as me before.
Therefore I start to make it a habit to shift my stop loss to breakeven when the price has moved certain pips in my favor.
If you have no idea where to shift to stop loss, I will suggest that you try shifting your breakeven to stop loss when the price has moved equal pip as your current stop loss.
For example, if your trade has a stop loss of 25 pips, you will shift the stop loss to breakeven when the price has moved 25 pips in your favor.
I hope that I have answered your question and do feel free to email me whenever you have questions.