Minimum Stop Loss


A question came up on Trade2Win that I thought probably was of interest to readers here as well.

Hi, has anyone done a ‘study’ on the minimum stop loss required for different times of the day, when trading eur/usd ? or is this even possible to determine ?

Minimum stop loss = least likelihood of being stopped out with the smallest monetary outlay.

Optimal stop levels are always on the mind of traders, especially those looking to develop systems. The problem is coming up with them is oftentimes a completely worthless exercise. I can tell you from experience that putting in some kind of fixed stop into many (most?) trading systems actually degrades the system’s performance, except in the case of very large stops meant to catch the largest of adverse movements.

All of this is why I constantly make the point that one should think not in strict “stop loss” terms, but rather in “trade exit” terms. By this I mean that the stop point should be placed in line with whatever the exit strategy of the system or method or whatever requires. If you’re trend trading then your stop should be at a point where indications would conclude the trend isn’t in play any longer. In a range trading system the stop would be at the point where it’s clear the range trade is no longer working.

A proper trading strategy has both a well thought out entry point and a well thought out exit point – be they systematically derived or discrectionary. The are each based on the intended focus of the strategy, not totally seperate approaches. If you attempt to mis-match entry and exit you end up with a system that is inefficient all the way around.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.

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Stop Loss Orders (Wealth Daily, 5/12/09)
Trailing Stop Discipline: How to Know When to Sell Your Stocks (Investment U, 9/8/09)
The Importance of Stop Losses (Contrarian Profits, 3/23/09)
Read more on Trailing Stop Order, EUR/USD at Wikinvest

  • Marti Atkins

    Trader Development: The Value of Coaching and the Difficulty of Finding One
    Posted 21/04/09
    Answered 31/05/09

    Trading and the Bacon and Tomato Quiche (pie)

    John I’d like to comment on the article you wrote and offer demonstration of your thoughts in another arena.

    My eighteen months experience of spread betting the Forex pairs is far from positive. I am determined to make a success of this and have taken a step back to try and analise why it has not successful and more importantly; why trading is such a negative experience for me.

    About three months ago I stated cooking lessons. Unlike trading, this was positive from day one. I enjoyed:

    The tutor’s company (shudup an’ do as yer told, she said ;c)
    The process – kneading dough is physical and relaxing)
    The food (no more supermarket pies for me:)
    The social aspect (sharing food is a very basic human interaction)
    The status (you OWN bread; really!)
    The research – What’s on youtube that’s interesting to cook

    I would start every cooking evening by cleaning and preparing the kitchen and lining up the ingredients.

    About a month ago, my mate (cooking tutor) had some family commitments for a few weeks. No problem,; she’s available on the phone and I will refine / practise what I have learnt. WRONG! VERY VERY WRONG MARTI!

    Week one was no problem. by week three I was baking once per week not three times.
    It’s now week six and I haven’t had a “baking Day” for two weeks and yet I loved the cooking. Therefor, what chance have I of cooking / trading regularly if, powerful and motivated self starter that I KNOW am, I have no “staying power” and that’s with the positive start? No wander that with such a harsh start to trading I would sooner stub a toe than face the charts again.

    So, with lesson in mind I start to plan for my weaknesses. Regular phone contact with chef even if there’s no problem and I have engaged the service of a professional mentor/life coach to keep me on track with all of my plans and ambitions. She not a trader and doesn’t need to be. She only need to recognise that I roll to a halt with out an outside influence and perform better with someone to “answer to”

    Thank you for you excellent website. It remains a key element of my plan to get back in the charts. Feel free to use any of the above if it of use.

    Best wishes,

    Marti
    London – UK